EXPLAINER: 4 reasons Nigeria inflation will continue to go rogue

Nigeria inflation worsened by COVID-19 pandemic

Nigeria’s annual inflation rose for the 17th consecutive time by 16.47% in January 2021, representing a 0.37-percentage point increase over 13.25 per cent recorded in December 2020, according to Nigeria’s statistics office, the National Bureau of Statistics, NBS.

The raging inflation is compounded by a roguish food inflation, which hit 20.57 per cent in the month under review as it rose 1.01-percentage point from the previous month.

Although the government through the monetary policy authorities are scouting for effective measures to curtail the rising inflation, it is not likely that the index, which has been at double digits since 2016, will ameliorate in the near future.

Here are four reasons why:

1. PERSISTENT FOREIGN EXCHANGE SHORTAGE: Nigeria has made practical efforts within the past 3 months to allow some flexibility in the foreign exchange market. That has improved liquidity levels, but the implication is the weakened naira, which has compounded the country’s inflation woes.

With the country depending on import to meet more than 80 per cent of local needs, a flexible FX regime has led to a flagging naira. This has raised the cost of imports, which has been transferred to the final consumer. The result is the rising double-digit inflation.

More so, with the monetary policy authorities facing increased pressure to devalue the naira and as they continue to make room for increased flexibility in the FX market, there will be no reprieve for the local currency, at least in the near term until a certain level of stability is achieved.

2. FARMERS/HERDERS’ CRISIS: The frequent clashes between herdsmen and farmers across the country has led to food shortages, as farmers have been unable to plant their crops. Where they were able to plant, herds of cattle had destroyed the farms, escalating the conflict and worsening the food crisis.

This food crisis is worsened by the fact that the herders/farmers’ conflict has intensified in the country’s food belt, which produces more than 70% of the country’s food.

Moreover, without adequate local food production to complement import, worrisome food inflation has become inevitable.

Unless the authorities consider urgent steps to arrest the rising tension between the herders and farmers, food inflation will continue to be a major driver of core inflation.

3. RISING COST OF IMPORT LOGISTICS: A recent report by Financial Times took a deep dive into how congestion, bribery and storage costs have compounded the woes of importers in Nigeria.

The report made a shocking revelation that it costs about N2 million to move goods from the port to some parts of Lagos – that is almost twice the cost of shipping the same goods from Europe or China.

Read also, Tougher days ahead for Nigerians as inflation rises to 16.47%

The cost of these imports are borne by the final consumer, adding to the inflationary pressures.

The Apapa port congestion seems to have defied solutions, costing the economy an estimated N6.7 trillion naira annually, as per this BusinessDay report.

Unless the authorities make concerted effort to address the perennial problem of the Apapa port congestion and reduce turnaround time for importers, the high cost of doing business in Apapa will continue to fuel inflationary trends.

 4. FUEL PRICE INCREASE: Within the past 6 months, the pump price of petrol has fluctuated between 143 to 162 naira per litre as Nigeria moves towards full deregulation of the downstream sector. As the price of crude rises in the international market, the now market-determined pump price continues to go up as well.

This has posed a new dilemma because while the increase in oil price has meant more revenue for the government, the rise in petrol pump price has led to an increase in the cost of transportation, thereby driving up the price of goods and services, and influencing negatively the core inflation.

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