The first part of this insight highlighted the strategies that the CBN was employing in its fight against inflation and their limitations. The second part will focus on an analysis of the components of Nigeria’s inflation and the factors influencing those components.
Components of Nigeria’s Inflation
Per the NBS CPI for April 2024 (“NBS Report”), the seven (7) biggest contributors to inflation with contributions of at least 1% are listed below:
The two biggest contributors are the Food and Non-Alcoholic Beverages and the Housing, Water, Electricity, Gas, & Other Fuel divisions. Together, they make up 68.5% of the inflation rate as of April 2024. Of this number, the food division alone contributed 17.09% to the inflation rate of 33.69%, representing over 50% of total inflation. It therefore stands to reason that if Nigeria can at least reduce its food inflation, it will significantly reduce inflation.
The seven biggest contributors to headline inflation—together, they represent over 80% of the 33.69% headline inflation rate—are items that we can classify as basic essential items necessary for survival and whose demand does not necessarily fluctuate with the business cycle of the economy. As such, a reduction in their supply or an increase in their cost of production may not necessarily lead to a reduction in their demand, especially as there are little to no alternatives for the consumer. We will therefore consider the factors affecting these divisions below:
Insecurity
No fewer than 165 farmers have lost their lives to attacks by bandits this year with the association of farmers in Sokoto state stating that over the past two years, they had paid at least N3bn to bandits who kidnapped them from their farms. Data from the Food and Agriculture Organization also shows that the prevalence of moderate and severe food insecurity in Nigeria increased from 34.7% in the 2014 – 2016 period to 69.7% in the 2020 – 2022 period, an increase in food insecurity of at least 100%.
Due to the general insecurity affecting farmers in Nigeria, many farmers either do not have access to large portions of their farms or have no access at all. Many more smallholder farmers have abandoned their farms altogether. In other cases, the bandits harvest large portions of the farm and burn the harvested crops. To put the scale of the loss in context, Nigeria is estimated to lose over $14bn yearly to the farmer-herder crisis alone. To hypothetically demonstrate the effects of this situation on prices, assume that Farmer A plants one hectare of corn at a cost of N1m with sale projections of N1.5m (50% profit). In the aftermath of bandit attacks, Farmer A is only able to access and harvest about 30% of the projected farm produce representing a harvest of goods worth about N450,000, and resulting in a loss on the cost of production of N550,000. To cover this loss, Farmer A would have to sell the 30% of the produce at the price of N1.5m, translating into goods originally worth N450,000 being sold for N1.5m, an increase of 233%.
Poor Crop Yields
Farmers in Nigeria have been faced with declining yields, with available data showing that Nigeria has the lowest average yield per hectare of five selected crops among its African peers like Ghana, Kenya, and South Africa.
For additional context, the yield per hectare of tomatoes is represented below:
Poor crop yields that are inconsistent with expectations mean that farmers have to increase prices to be able to make a profit and farm again, having lost some of the farm inputs to poor yield. Factors like poor quality of seed inputs, the existence of pests, insufficient and inefficient application of fertilisers (14kg of fertiliser is applied per hectare in Nigeria in comparison with the global average of 146kg), and the absence of irrigation all contribute to the poor crop yields in Nigeria. For example, in 2023, the existence of the Tuta Absoluta pest significantly reduced the tomato yield and quality of the planting season, driving tomato prices up by more than 500% with the loss to the farmers estimated at N1.3bn.
Lack of adequate storage infrastructure
There is a dearth of adequate storage infrastructure in Nigeria. In addition to losses resulting from insecurity and low yields, about 40% of the food that is produced gets wasted between the farm and the final consumer. From the available data, this is more than double the global average of 15.3%. As with insecurity and poor crop yields, farmers are unable to sell the damaged produce, therefore leading to an increase in the price of the produce that survives.
Declining Naira Power
As part of the economic reforms of the current administration, the CBN on June 14, 2023, announced the unification of all segments of the Nigerian Foreign Exchange Market (NAFEM) and effectively floated the naira, representing a diversion from the fixed exchange rate policy that it had operated over the years. The results since that announcement have been disastrous, to say the least. The volatility that followed the announcement, with swings in the NGN/USD exchange rate and a depreciation that saw the naira depreciate by nearly 100% within 24 hours of the policy announcement and subsequently saw the Naira trade as low as N1,900/1 USD was unprecedented. FX inflows that were projected as a result of the shift in policy did not arrive and the expected convergence of exchange rate markets did not happen as the parallel market still trades at a different price point to the NAFEM. As I write, the Naira trades at the rate of N1,328/1 USD on the NAFEM with rates as high as N1,450/1 USD at the parallel market.
For businesses that source raw material inputs and finished goods from outside Nigeria, the situation has been nightmarish with several companies seeing their profits wiped out by foreign exchange losses. Nestle Nigeria Plc in particular, saw its shareholder funds wiped out after posting a N79.5bn loss in 2023. While it clarified that 94% of its N195bn FX losses are related to unrealised exchange losses, the continued volatility of the Naira and the declining exchange rate means that these losses may not be going away anytime soon. In addition, increased customs duties as the Nigerian Customs Service benchmarked its rate of import duty collection to the prevailing exchange rate set by the CBN has seen import duties on items climb by more than 200%. Importers of items have merely passed these costs on to the final consumers. A good example is the prices of several brands of cars doubling between June 2023 and May 2024.
Increased Energy Costs
President Bola Ahmed Tinubu, in his inaugural speech on May 29, 2023, declared the removal of the petrol subsidy. The immediate effect of this announcement saw PMS prices immediately rise by at least 100% in every part of the country and at least 200% in certain parts of the country. According to available data, the average PMS price has increased by about 195% from N238.11 per litre in May 2023 to N701.24 in April 2024, while the average AGO price has increased by 68% from N844.28 per litre in May 2023 to 1,415.06 in April 2024. There were also issues of fuel scarcity in 2023 and 2024, with reports of fuel stations selling petrol for as high as N850 to N900 per litre and black-market prices of as high as N1,500 per litre, well over the average price of N701.24 per litre.
The effect of this increase was astronomical and felt in every aspect of the life of ordinary Nigerians. In a country with a vehicle population of 12 million, a population of 250 million people, 6.8 million (57%) of the vehicle population being used for commercial purposes, and barely any rail network, commercial vehicle transport is key for the transportation of both goods and humans. Transport costs more than doubled overnight with many commercial transport operators simply passing on these costs to consumers. As such, the increased energy costs were priced into the value of goods and services offered by sellers, with many businesses folding up as the goods and services they offered were priced out of the reach of ordinary Nigerians.
The LPG industry was not spared, either, with the prices of refilling 5kg and 12kg cylinders increasing by more than 50% from May 2023 to March 2024. For restaurants that used LPG for cooking, these costs had to be priced into the services they provided, leading many restaurants to implement increases in the prices of the food items they offered for sale.
The recent increase in electricity tariffs has also contributed to high energy costs, with a recent report detailing the implications of the increase in the health sector with hospitals having to shift the costs to patients amidst fears that the increased costs may see patients pivot to cheaper but dangerous alternatives.
Drop in Supply of Goods and Services
A report shows that the Manufacturing Association of Nigeria (“MAN”) revealed that 767 manufacturing companies shut down operations in Nigeria in 2023, with a further 335 experiencing distress. For context, MAN is a national industrial association serving and representing over 2000 companies in private and public sectors in the manufacturing, construction, and service sectors of the national economy. Further, the Chairman of the Lagos State Chapter of the Nigerian Association of Small-Scale Industrialists, NASSI, recently stated that over 30% of the over 24 million registered small and medium enterprises in Nigeria folded up in the year 2023. Recently, Okomu Oil Palm Plc threatened to shut down its business in Nigeria over prolonged insecurity directly impacting its operations.
The law of demand is simple. If supply remains unchanged or reduces while demand increases or remains unchanged, prices rise. In a scenario where about 50% of the manufacturing companies in Nigeria and another 30% of the total registered SMEs in Nigeria either shut down or experienced distress, then it is not out of place to say that the supply of goods and services to the Nigerian market drastically reduced in 2023. As stated earlier, the increasing percentage of currency in circulation that is outside the banks meant that aggregate demand for the items being supplied by these entities may have continued to increase, therefore leading to an increase in prices.
Conclusion
A cursory look at the above factors shows that inflation in these seven critical sectors is generally driven by reduced supply, production losses, and increases in the costs of the inputs needed to affect the supply of goods and services in these sectors. Thus, we can confidently say that Nigeria’s inflationary pressures are mostly structural and due to rising costs rather than simply due to aggregate demand outpacing aggregate supply.
There is no magic wand that can wish away these structural defects. The Federal Government must recognise that the CBN is not the only institution responsible for tackling inflation in Nigeria. An examination of the Nigerian economy shows that there are clear structural defects that need to be addressed by the Federal Government before inflation can be successfully tackled. As earlier stated, food inflation represents over 50% of the overall headline inflation. As a result of the core importance of food to human survival, it is very unlikely that raising interest rates will have an effect on the demand for food, as human beings must eat to survive. A combination of the highlighted factors means that Nigeria is currently experiencing a reduction in the already low supply of food and, consequently, an increase in food prices. Because service providers must eat, they will, in turn, increase their prices to be able to afford food, and the farmers will, in turn, increase their food prices to be able to afford these services, thus leaving us in a circular situation of price increases. The Nigerian government must tackle the structural issues in the economy to boost production, lower costs, and, consequently, reduce inflation. Any other solution is, at best, temporary.
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