BusinessDay
NigeriaDecides2023

Who is benefiting from rising food prices in Nigeria? (2)

Worthy of note: the recent sharp, steady spike in food prices started in August 2019. Nationally, between this period and August of 2021, average food prices rose by roughly 18 per cent, but lower in the north (8 per cent) and highest in the south: 25 per cent. Apparently, the south is driving the rise in national food prices as it contributes 78 per cent to the overall increase, paying five times more in food prices than the north.

Since the south is driving nearly 80 per cent of the country’s rising food prices and given that there is a strong connection between food prices in the south and diesel prices in the north, then the cost of transportation (proxied by diesel prices) is contributing to the north-south food price differences. That means consumers of food items transported from the north to the south are paying a substantial part of the food inflation burden. They are the “losers!” And, neither are northern farmers the winners because food prices in the south are higher than food prices in the north by an amount almost equivalent to the cost of transporting the food items from the north to the south. Therefore, the likely winners may be living offshore—the oil marketers and those supplying refined petroleum products to Nigeria—given that about 80 percent of the diesel is being imported.

There is a relationship between the average fuel (AGO) prices in five Nigerian states with the cheapest food prices and the cost of food items in five Nigerian states with the highest average food prices.

For instance, based on my estimate using the data, an additional one naira in the price of diesel in the north is expected to result in an additional five naira in average food prices in the south.

The rise of the dollar

There is a widely held view among many Nigerians regarding the forces at the roots of rising food prices in their country: that the depreciating value of their local currency is responsible for the food inflation. There is some partial (or grain of) truth in this claim.

Based on my analysis of a 2019 survey by the NBS, 32 percent of Nigerian households reported buying imported rice, spending only 3 percent of their entire food expenditure on foreign rice. By default, the price of imported rice is expected to rise with the rising value of the dollar.

On the other hand, it’s a partial truth because locally cultivated (not imported) food items such as gari, white maize grain, yam, brown beans, vegetable oil, palm oil, white black-eyed beans, red maize grain, etc., together are responsible for 85 percent of the surge in food prices between August 2019 and September 2021.

Possible solution

In charting a way forward, two things can be done. First, close the inter-regional price differences (which may lower the national food prices) by setting up a more efficient transport system that connects the two major regions of the country. One of the ongoing railroad projects in the country linking Nigeria’s two commercial capitals: Lagos in the south near the Atlantic Ocean and Kano in the distant north (the region with a comparative advantage in producing food items) is a welcome development.

Second, since Nigeria imports over 80 percent of its currently consumed petroleum products, local pump prices of petrol and diesel must be divorced from changes in international oil prices if they must be kept stable. One way to bring this to fruition is for the country to refine its total demand for diesel and petrol.

This brings to fore the forthcoming Dangote refinery, which is expected to be the largest in the world. Whatever support is necessary from the government should be given without hesitation. If its take-off is successful, the refinery will not only bring about a positive discrete shift in Nigeria’s oil industry but will also play a key role in revamping Africa’s largest economy. It will, among other benefits, raise Nigeria’s external reserves by replacing imports of refined petroleum products that cost about US$7–10 billion annually.

However, there are two vital questions that Mr Dangote, the federal government of Nigeria, and their dealmakers, must provide clear answers to. First, the refinery is expected to pump and refine 650,000 barrels of crude oil per day. Will it pay for the oil in dollars? Otherwise, the refinery will cut Nigeria’s flow of foreign exchange by over $60 billion annually. This is based on my estimate using data on oil prices and oil production.

Read also: Who is benefiting from rising food prices in Nigeria?

Second, how will he set the pump price of his petroleum products? If the government steps back from its refining business, Mr Dangote, as the leading investor in the oil industry, could possibly rule the Nigerian oil market. But he can be checked via an unvarnished regulatory process. It is hoped that, if all goes well, the refinery will stabilise the local pump price of petroleum products and possibly lower the average cost of transportation across the country. However, the recent upward adjustment in petrol pump prices is setting the stage for the Dangote refinery to widen its profit margin because he will be stepping into the market to meet higher prices relative to the recent adjustment.

Dr Dapel, senior fellow (non-resident), Nigerian Economic Summit Group, and former IDRC Fellow, Center for Global Development, Washington, D.C. writes via zdapel001@dundee.ac.uk, Twitter @dapelzg

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