The Nigerian economy, which had in recent time wobbled under inflationary pressure, was dealt yet another blow as inflation figures soared to an 11-month high, further tightening the purchasing power of the populace, according to the Consumer Price Index (CPI) data, which measures the average change overtime in the prices of basic consumer goods and services.
The latest CPI report from the National Bureau of Statistics (NBS), showed that Nigeria’s inflation rate climbed for the fourth consecutive month to 17.7 percent in May 2022 from 16.82, while the headline inflation rose 0.02 percent month-on-month to 1.78 percent.
Food inflation, which comprises over 50 percent of the inflation rate, rose to 19.5 percent, its highest in eight months, compared to 18.37 percent in April. The rise in the food index was led by increases in the prices of food commodities including bread, cereals, yam and other tubers, fish, meat, and oils.
On a similar trend, the urban inflation rate rose to 1.81 percent in May 2022, a 0.003 percent increase compared to 1.78 percent in April 2022, while the rural inflation rate jumped 0.02 percent month-on-month to 1.76 per cent.
The “All items less farm produce’’ or Core inflation, which excludes the prices of volatile agricultural produce stood at 14.90 percent in May 2022, up 1.75 percent on a year-on-year basis, compared to 13.15 percent recorded in the similar period last year. On a month-on-month basis, the core sub-index jumped 0.65 percent to 1.87 percent in May 2022, compared to 1.22 percent recorded the previous month. The NBS said the highest increases were recorded in prices of gas, liquid fuel, garment, solid fuel, cleaning, repair and hire of clothing and passenger transport by road.
Oluwatoyin Mayowa, analyst at Financial Derivative Company Limited, attributed the food inflation hike to high logistic costs, especially in transportation of food items from the rural areas where they are largely produced to urban areas where the larger proportion of final consumers dwell. The uptick in core inflation, Mayowa explained, was driven by high energy cost and naira’s depreciation to 610 naira per dollar in May.
Prior to the NBS report, the World Bank, in its assessment of the impact of inflationary pressure on Nigeria’s economy, noted that the situation has been compounded by policy distortions, such as lack of flexible foreign exchange (FX) management, trade restrictions, and conflicting monetary policy goals.
In this regard, the international financial institution in its recent Nigeria Development Update (NDU) report titled, “The Continuing Urgency of Business Unusual”, projected that the continuous rise in inflation amid global commodities volatility, would push an additional one million Nigerians into poverty by the end of the year.
The latest projection, the report explained, is on top of the six million it previously predicted before the Ukraine war, adding that Nigeria is in a paradoxical situation where growth prospects have improved but inflationary and fiscal pressures have also increased considerably, leaving the economy much more vulnerable, amid a hike in the cost of gasoline subsidies and a decline in oil production.
Fitch Solutions, in a report titled, “Elevated Inflation Will Weigh on Consumer Spending,” released in May 2022, warned that the persistently high inflation in Nigeria will continue to negatively impact consumer spending power over 2022, with total household spending in nominal terms projected to reach N150.9 billion in the year from N128.5 billion recorded in 2021.
According to the country risk and industry research firm, Nigeria’s rising inflation rate could be a key risk to consumer spending in 2022, as it may reduce purchasing power, limiting spending on essentials.
Fitch Solutions attributed the galloping inflation to the Ukraine-Russia conflict, which it said has significantly impacted the global supply prices of key commodities, such as oil and gas, fertiliser, wheat, corn and barley.
“The commodity price increases are already feeding through into higher consumer prices and will continue over the year. We believe that rising consumer price inflation is a key risk to consumer spending over 2022, as it has the potential to erode purchasing power and shift spending away from discretionary spending,” it stated.
Robert Omotunde, chief investment officer, Afrinvest West Africa, identified the Classification of Individual Consumption by Purpose (COICOP) as the basis for inflation competition, noting that the purchasing power of millions of Nigerians have shrunk due to the rising cost of basic necessities that are continually growing above the reach of their income levels.
Omotunde pointed out that as a result of this factor, many Nigerians are forced to forfeit purchase of other necessities for basic food items to assuage hunger.
Explaining further, he said, “The demand for food is inelastic. As prices of food are going higher, you will need at the minimum that portion that is sufficient to keep you alive. What you then see is that low income earners have to shift from other necessities of life just so as to feed.”
Curbing inflationary pressure on economy
For Nigeria to effectively curb the ripple effects of rising inflation on the Nigerian economy and consequently, the populace, the World Bank recommended some policy priorities which include:
Adopting a single, market-responsive exchange rate regime and enhancing exchange rate management.
Fully reopening land borders to trade and strengthening regional cooperation to combat smuggling.
Removing import and FX restrictions on staple foods and medicines while replacing restrictions with tariffs that reflect the Economic Community of West African States (ECOWAS) Common External Tariff;
Reducing subsidised CBN lending to medium and large firms, and instead, expanding the scope for commercial banks to lend at a risk-adjusted rate.
Curbing inflation hike through complementary measures, such as eliminating trade and FX restrictions, enhancing exchange rate management, reducing the monetary financing of fiscal deficits, raising excise taxes on alcohol and cigarettes (sin tax).
Implementing the electronic money transfer levy
Introducing a new, sustainable revenue source from a green surcharge on imported vehicles.
Catalyze private investment to boost job creation and support stronger and more inclusive growth by reducing inter-state and international trade and transportation costs.
Introducing risk-based management of customs interventions and a streamlined trusted trader programme.
Improving the transparency of key government-to-business services.
Increasing affordable access to broadband; amongst other measures.
The World Bank concluded that the highlighted suggestions will add to policy options for reducing inflation and will also foster private investment by increasing access to markets and improving the availability and accessibility of FX.
