How border closure changed Nigeria’s economic indices
The government had in August, ordered partial closure of land borders to curtail smuggling of rice and other products into the country, citing non-compliance of neighbouring countries with ECOWAS protocols on the transit of goods.
The move would create an opportunity for local producers of commodities such as rice, vegetable oil, palm oil and other agricultural produce to increase production and meet local demand.
But the nation’s inflation numbers have become the first casualty of policy-induced pressure with a 0.22 per cent rise to 11.24 per cent in September, against 11.02 in August.
The average prices month-on-month basis, rose by 1.04 per cent in September, in both food (13.5 per cent) and non-food (8.9 per cent) items, particularly the prices of bread and cereals, oils and fats, meat, potatoes, yam, and other tubers, fish and vegetables.
Indeed, the majority of these items, if not all, pass through Benin Republic’s commercial city of Cotonou, with a large portion of them smuggled into the country and adding no economic value to Nigeria’s fiscal projections.
Besides, with agricultural output in the country still at low levels, creating availability challenges, the policy announcement heightened speculations and made worse by supply shortages due to the implementation of the border post order, leading to a broad-based increase in consumer prices.
In the short term, especially given the supply-demand gap of these commodities as well as the time required to cover this gap, shortages are expected, and as a result of this, higher prices.
For analysts at FSDH Merchant Bank Limited, although rice production has significantly increased in the last four years, the supply-demand gap is still significant and will be exacerbated by the recent border closure.
Citing United States Department of Agriculture (USDA) estimates, they noted that local demand at 7.3 million metric tonnes, while local production stands at 4.8 million tonnes yearly.
Also, analysts at Afrinvest Securities Limited describe as “unsurprising,” the food inflation, which advanced to 13.5 per cent year-on-year in September, against 13.2 per cent in August, following a faster month-on-month upswing in the food index to 1.3 per cent from 1.2 per cent in August 2019.
“The increase in food inflation year-on-year and month-on-month was the first in four months and notably, this was in contrast to the deceleration usually observed, following the onset of the harvest season.
We suspect that the negative impact of the partial border closure on trade, which is mainly in food products, might have offset the reprieve provided by food harvests,” they said.
Citing a Central Bank of Nigeria’s estimates, they noted that informal cross-border trade conducted through land borders remains sizeable at $6.9 billion between mid-2013 and mid-2014.
“The share of food in informal cross-border trade was 75.7 per cent within the same period, which we believe wouldn’t have changed significantly since.
“As the FG has recently ordered a full closure of the border, which effectively stops the trade in illegal and legal goods, we expect a sustained negative impact on consumer prices in the following months.
“This would mask the reprieve usually provided to food prices from harvest in the last quarter of the year, especially as the festive season is upon us,” they added.
Similarly, a report by FSDH Merchant Bank showed that the inflation outlook is presently negative for the remaining part of the year, which is a clear departure from the first nine months of 2019.
“These pressures are likely to stem from higher government spending, a potential tax increase and the sustained closure of the land borders. However, the real interest rate is expected to remain positive in 2019.
“Consumer demand is expected to increase in the fourth quarter of the year, especially as the festive season approaches. This, coupled with the border closure, will result in inflationary pressures, particularly in the months of November and December,” the bank’s analysts said.
According to the bank’s research, before the border closure, the price of a 50 kilogram bag of rice had already increased significantly from N14,000 to roughly N25,000 in October, an indication that local producers are taking advantage of the situation to increase pricing, given that rice is a popular staple food across Nigeria. “This is expected to trigger food inflation in the coming months”.
The recent increase in the inflation rate, though marginal, coupled with inflationary pressures are huge concerns for monetary authorities, but more worrisome to note that in an era of rising inflation, Monetary Policy Rate is less likely to be reduced and more likely to be increased to maintain a positive real interest rate.
Nigerians, especially manufacturers and small business operators have consistently asked for a regime of low interest rates, given the huge costs that are associated with the country’s poor infrastructure and security. A renewed inflationary pressure would lead to disappointing expectations.
In the same vein, higher prices have negative implications on consumer spending, companies’ earnings, employment, and overall output.
Recent developments, according to FSDH, suggest that inflation is expected to surge in the coming quarters and that is a gloomy outlook. Already, with real GDP growth of two per cent in 2019, which is lower than the projected population growth rate, real GDP per capita is projected to decline in 2019 with an adverse effect on consumer spending.
Indeed, the government must avail itself of options, weigh them appropriately, adopt ones with less repercussion and implement its policies effectively. Lapses and avoidable failures in government must not be a reason for policies that would inflict general economic consequences.
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