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Nigeria's Misery Index Rises as Inflation Reaches 15.75% - PROSHARE

JANUARY 17, 2021

Nigeria's headline inflation rate rose to 15.75% in the month of December 2020 (from 14.89% in November) according to a recent report published by the National Bureau of Statistics (NBS), the inflation rate  represented the highest monthly rate increase since the beginning of 2020. The rise in food inflation has been a major reason for the rise in headline inflation, food inflation rose from 18.30% in November 2020 to 19.56% in December.

The rise in food inflation was attributed to increases recorded in the prices of bread and cereals, potatoes, yam and other tubers, meat, fruits, vegetable, fish, and oils & fats. Also, core inflation rose from 11.05% in November 2020 to 11.37% in December 2020. The highest increases in core inflation were recorded in prices of passenger transport by air, medical services, hospital services, shoes and other footwear, passenger transport by road, miscellaneous services relating to the dwelling, hairdressing salons, and personal grooming establishments, repair of furniture, vehicle spare parts, pharmaceutical products, motor cars, maintenance and repair of personal transport equipment, paramedical services, motorcycle, dental services, and bicycles (see Chart 1 below).


Chart 1: Nigeria's Inflation Rate

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Source: NBS, Proshare Research

 Headline inflation topped the 15% threshold expected by analysts. Most analysts had predicated their forecast on the pre-existence of structural rigidities which were yet to be eliminated. Furthermore, the festive period created a significant increase in the demand for commodities and services, hence, the increases recorded in the consumer price index (CPI). Nigerians in their usual spirit of celebration and festivity trooped to major shopping malls, increased their demand for commodities and transport services which further added pressure on prices, for example, there was an increase in transport and commodity prices. Nigeria's rising inflation suggests an increase in the misery of its citizens as wells as a reduction in purchasing power (see illustration 1 below).

Illustration 1: Nigeria's Inflation Rate: The Mixed Realities of Price Hike

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Analysts have noted that the rise in the inflation rate has eroded real investment yields, as headline inflation in 2020 blasted past returns on several financial asset classes. According to analysts a continuous rise in inflation could lead to a decline into Nigeria's capital importation numbers with foreign investors spooked by the lower real domestic returns on investment and the likely adverse consequences for the country's foreign currency rate (see illustration 2 below). 

Illustration 2: The Many Stings of Inflation

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Policies Weighed in the Balance

Local economists have noted that some of the government's policies in 2020 although well-intentioned simply fanned inflationary flames.

 Analysts noted that Nigeria's rising food inflation may be attributed to the fallout of a border closure in August 2019. The Nigerian government in an attempt to achieve food self-sufficiency, and prevent smuggling shut its borders. Since the border closure there has been a consistent rise in food inflation. Matters were made worse by lockdowns made necessary by the coronavirus pandemic resulting in supply chain disruptions and spikes in production and logistic costs.

The government reopened the land borders on December 17th, 2020, perhaps in line with the AfCFTA pact of a single market and the free movement of goods and services which it had signed earlier in the year. Although the reopening of the land borders was greeted with  some pleasure by businesses, analysts believe that inflation would remain at double-digit as the ban on rice, poultry, and other goods still subsists. The border reopening will only ease supply constraints and marginally reduce the food supply gap.

To ease the pressure on the inflation, the government in its Finance Act 2020 announced the reduction in duties on tractors from 35 to 10 percent, from 35 to 10 percent on vehicles for transportation of goods; and 35 to 5 percent on vehicles for transportation of persons (cars).  Although, this policy was enacted to reduce transportation costs which has been a major driver of inflation, the outcome appears uncertain. Economists have argued that a major reason for the rise in transport cost is fuel cost. Therefore, the impact of reducing duties on vehicles would be insignificant. Furthermore, analysts argue that the cut in duties on imported vehicles would stifle local automobile production and worsen unemployment. To be sure, government policies have been diligent but often misguided (see illustration 3 below

Illustration 3: Policy Aim at Inflation: Hits, Misses, and Grazings

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 Nigeria's pathway to a declining inflation rate is convoluted (see illustration 4). As previously noted, a major trigger of Nigeria's rising headline inflation is food inflation. Some supply constraints that have fueled food inflation include rising insecurity, logistics, and transport constraints. Therefore, analyst believe that the government would need to ensure that mechanized farming is promoted, proper storage facilities are constructed, personal and communal security is assured and technology gains faster-paced adoption across local production value chains.

Illustration 4: Inflation: Hear the Thunder, Avoid the Lightening

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Fiscal Policy to the Rescue?

The unconventional intervention of the Central Bank of Nigeria (CBN) in macroeconomic management over the last few years has left it with little additional wriggle room. The creation of a complex alchemy of funds to bolster domestic production has stretched its policy elasticity to the limit and compelled it to think in new ways, in particular the government may need to think more about fiscal policy and budgetary tools of economic management.

With inflation piercing new heights the CBN has been prevented from reducing its monetary policy rate (MPR) to spur growth and reduce domestic lending costs. An attempt to reduce the MPR below 11.5% might worsen domestic inflation given the country's relatively low productivity and supply-side rigidities.  In the face of this challenge, analysts believe that the CBN in its first monetary policy committee (MPC) meeting for 2021 might maintain a policy freeze, with all monetary policy rates held constant. It is expected that the MPR rate will be left unchanged at 11.5%, cash reserve ratio (CRR) at 27.5%, and liquidity ratio at 30%.

Economists believe that there is no silver bullet to Nigeria's inflation situation. Nigeria's inflation rise is attributed to cost-push factors trapped by structural rigidities. Therefore, in solving its inflationary problems, analysts argue that both fiscal and monetary measures must be harmonized to resolve the structural deficiencies. They also believe that the federal government must address the problem of communal farming insecuritity  caused by Boko Haram inurgents and cattle rustlers and kidnappers. If Nigeria is to wriggle out of its present inflation difficulties, solace is not in hope but in coordinated monetary, fiscal and  security action. Hope is not a method.



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