• Saturday, November 23, 2024
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BusinessDay

Explainer- Why Nigeria’s inflation is rising

Honesty and credible data are requisites for fighting poverty

Mary Sanya, a single mother of three daughters, who has been a dry cleaner for five years, finds it hard to keep up with the increasing expenses since her husband died.

The mother in her early thirties and children – Feyi, 18, Fola, 11, and Mercy, 6 – are struggling to make ends meet with her little salary as prices of goods and services have surged.

And despite the increase from her initial salary of N40,000 two years ago to N50,000 at the beginning of the year, Sanya still cannot meet up with the inflationary pressures.

Things have become too expensive, she said in frustration.

“We’ve not bought eggs since last year when it increased from N11, 000 per crate to N25, 000. Even a bag of sachet water is now N200 from N150,” Sanya lamented. “We’ve also had to switch to firewood because of the constant surge in the price of cooking gas,” she added.

Sanya, like many other Nigerians, is feeling the pinch from the rising inflation in Africa’s biggest economy which has seen a double-digit growth to 16.82 percent in April 2022 from a single digit of 9.62 percent in January 2016, according to the National Bureau of Statistics (NBS).

The April inflation rate is also the highest in eight months and also the among the highest inflation rate in the world.

Additionally, food inflation, which comprises more than 50 percent of the inflation rate, rose to 18.37 percent, highest in seven months compared to 17.20 percent in the previous month.

The rise in the food index was caused by increases in the prices of bread and cereals, food products, potatoes, yams, and other tubers, wine, fish, meat, and oils, the report stated.

Last year, the World Bank said that the country’s high inflation rate has pushed more people into poverty. In 2020, the number of poor persons increased to 90.1 million in 2021 from 82.9 million. And it is projected to hit 95.1 million in 2022.

On why inflation rate has surged over the past couple years, BusinessDay analysed a recent article by the Internationally Monetary Fund (IMF) titled ‘The Future of Inflation Part I’ that explains some of the causes of high inflation worldwide.

“Why inflation is high and whether it will persist is a topic of active debate. We see five key drivers of the current inflation surge, with implications for this debate,” Ruchir Agarwal, a senior economist at IMF’s Research Department stated in the article.

Here are some of the causes.

Supply chain disruptions

The food chain in Nigeria involves farming, transportation, processing, and retailing. However, this food chain gets disrupted due to various factors, which include insecurity, bad roads, and obsolete facilities, amongst others.

The worsening state of insecurity in the country continued to obstruct farming activities and deter agricultural investments in key crop-growing states, while putting existing agribusinesses in constant peril.

Africa’s largest economy’s food security crisis, which was worsened by the COVID-19 pandemic and its effect on the country’s food value chain, is now being compounded by the Russia-Ukraine war that affects the availability of grains such as wheat and even inputs required for producing fertiliser.

Read also: Rising inflation, interest rates threaten jobs market recovery

Furthermore, transportation of some food items, which is supposed to take a few days, takes longer than expected due to the bad roads. The food items spoil before they even get to the retailer, and the lack of modern storage facilities doesn’t help matters.

Supply shocks to energy and food caused by the Ukraine-Russian crisis

Russia and Ukraine are both major commodity exporters, and the disruptions caused by the war and restrictions have caused higher inflation globally. Global prices of oil, natural gas, and food prices have risen making it harder for middle- and low-income earners to afford basic needs.

“These effects will lead inflation to persist longer than previously expected. The impact will likely be bigger for low-income countries and emerging markets, where food and energy are a larger share of consumption (as high as 50 percent in Africa),” Agarwal said.

A major area of impact in Nigeria has been food prices, since both countries at war are major producers and exporters of agricultural commodities, particularly grains, and countries like Nigeria depend heavily on them for inputs in direct human consumption and industrial processing.

Government spending

When the government increases its spending, more money goes into circulation in an economy. This leads to an increase in consumer spending, and with no increase in the production of goods and services, it can lead to inflation.

The government took some measures to cushion the impact the COVID-19 pandemic had on households and businesses in the year 2020, and these included the N50 billion targeted credit facility stimulus package with a five percent interest rate it gave, amongst others.

Also, the GDP by expenditure report by NBS also shows that government spending increased the most in 2020, to N13.43 trillion, and although it declined to N9 trillion in 2021, this is still more than the pre-pandemic levels.

A shock to labour supply

The labour shock due to the pandemic in the US had a big impact on Nigeria because it affects the exchange rate and import price index.

In advanced countries, labour is a cost of input in production, meaning that cost of production will be higher if labour is scarce and it then increases the price of goods.

This means that the tighter the labour market in these countries perpetuates the impact of exchange rate pressure on the part of imported inflation in Nigeria.

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