Close button
The Guardian
Email YouTube Facebook Instagram Twitter WhatsApp
x

Inflation, rising input costs spell trouble for manufacturers, consumers

Related

Niyi Adebayo, Minister of Trade and Investments

The local manufacturing industry is trying to absorb the impact of increase in the cost of raw material, occasioned by currency devaluation, to protect consumers but it seems that the price hike is inevitable for many products. With disposable incomes dropping further, there are concerns about how much shock producers and consumers alike can absorb. Femi Adekoya writes.

Measured by the Consumer Price Index (CPI), inflation indicates the broad-based level of prices of goods and services in an economy. Little wonder then that the figure is crucial to both economists and policy makers.

Ideally, if salaries increased at the same rate as inflation, there would be no hardships. Unfortunately, inflation is not an across-the-board price increase. Prices of different commodities increase at different rates at different times, affecting different sections of the population. For many Nigerians in recent times, access to food and consumer items is getting difficult by the day.

Unlike in advanced nations like the US, Japan where some level of inflation is tolerable to stimulate economic activities, Nigeria’s inflationary trend is detrimental to its growth due to its structural deficiency, logistic problems, insecurity, among others.

Indeed, many of the factors that have fueled Nigeria’s rising inflation are not showing any signs of receding.

x

Despite the re-opening of the border in December 2020 and concerted efforts to bring down the rise in food inflation, it has sustained its upward trend for many months and it is projected that the food inflation rate could surge further in months to come. The spike in food inflation has been consistently linked to the rise in insecurity, logistic challenges, and infrastructural deficiencies.

For the common man, the effect of inflation is felt when the purchasing power of the naira falls, that is, what one could use to buy a kilogram of rice, will now fetch only half a kilogram. Also, commodity wholesaler dealers may try to hoard essential commodities like food grains in hopes of reaping profits when prices increase further on dwindling supplies.

Similarly, fixed income groups will be hit the hardest because their salaries will not be revised to include the cost of living even as prices of items soar, while household as well as national savings drop because there is less money to save now as people use a greater part of their disposable income to pay for daily-use commodities.

Also, luxury goods sellers and non-essential items retailers would begin to witness low sales as people prefer to not spend money on “luxury” items, sticking instead to the “necessities”.

Already, findings have shown that the number of dependents in the country is on a steady rise on the back of high population, and more recently, unemployment rates, mounting pressure on disposable incomes and limiting the impact of government’s intervention in the economy.

Though the country recorded an inflation rate of 18.12% in April 2021, indicating the first decline in headline inflation in about 20 months, local manufacturers noted that the reduced inflation rate of April is still far from the healthy inflation rate needed to kickstart the economy.

x

In April, core inflation was up by 7bps to 12.74% y/y. Pressures were most significant in the prices of pharmaceutical products, vehicle spare parts, hairdressing salons and personal grooming establishment, garments, furniture and furnishing, medical services, shoes and other foot wears, motor cars, major household appliances whether electric or not, dental services, hospital services, non-durable household goods, and fuel and lubricants for personal transport equipment.

The Director-General of Manufacturers Association of Nigeria (MAN), Segun Ajayi-Kadir, stated that the manufacturing sector is still battling for survival as its growth rate is not impressive, adding that the current inflationary condition in Nigeria adversely affects the profitability of manufacturing and is partly responsible for its poor competitiveness in the sector.

“Of course, the inflation rate of 18.12% is still not healthy for the well-being of the people and the growth aspiration of the economy and should therefore be properly managed before it spirals out of control,” Ajayi-Kadir said.

MAN urged the FG through the CBN and Finance Ministry to work on more policies that affect the real sector to prevent a clash in policy implementation.

“For instance, while CBN was creating funding windows at single digit interest rate to encourage production, the government increased VAT from five per cent to 7.5 per cent. Similarly, the government increased the minimum wage and also allowed an increase in electricity tariff and so on.

“Government, in partnership with the manufacturers, should select strategic products, particularly those with high inter-industry linkage, for backward integration support and upscale the drive for the resource-based industrialisation agenda,” he said.

x

Earlier, the Lagos Chamber of Commerce and Industry (LCCI) expressed concerns about persistent increase in domestic prices, noting that continued uptick in inflation has profound implications for all stakeholders in the economy including households, businesses, and investors.

According to the Chamber, the uptick in inflation weakens purchasing power and consequently worsens the poverty conditions, adding that the situation equally escalates operating and production costs and erodes profit margins and ultimately undermines investors’ confidence.

LCCI President, Mrs Toki Mabogunje, noted that the key inflationary drivers are basically supply-side issues, which are beyond monetary policy control.

The LCCI identified security concerns in Northern and Middle-Belt region which has continued to disrupt agricultural activities in those areas, high cost of transporting food commodities from farms to markets as a result of elevated energy prices such as Premium Motor Spirit (Petrol) and Diesel, lingering productivity issues in the agricultural sector, leading to weak output outcomes, and high cost of imported food items (as well as agricultural inputs) due to foreign exchange shortage, as major factors causing a spike in food prices.

To analysts at Financial Derivatives, while the controversy rages on whether the current inflation is reflective of reality, they noted that “we must bear in mind that the CBN has been consistent in its contention that an inflation rate above 12% is growth retarding. It has also been resolute in its belief that a stable exchange rate is an antidote to rising inflation.

“Inflation has its seasonality features and core inflation, which discounts seasonal factors from headline inflation, is expected to be relatively mild this time. Whilst the planting season effect will take a toll on prices in the next quarter, one feature of the planting season this year is that farmers who normally consumed only grains are now consuming seeds and grains.

x

“Seed consumption reduces the planting stock and slashes the harvest of next season. Therefore, we should expect some shortages in food output next quarter in addition to higher logistics costs and ultimately higher food inflation in Q3”, they added.

The Nigerian Economic Summit Group (NESG), in its report on 2021 Macroeconomic Outlook titled: “The Four Priorities for the Nigerian Economy in 2021 and Beyond,” argued that government’s support is required to make the inflow of private investments into the manufacturing sector a reality as Nigeria’s recent experiences have shown that significant investments in manufacturing sector were realised when there is an intersection of market opportunities and government support.

It, therefore, recommended that the federal and state governments should come up with industrial policy and sectoral plans for identified priority areas in the manufacturing sector. Besides, the government should also demonstrate commitment in implementing existing plans, provide targeted infrastructure and address the challenge of insecurity in the country.

The report described Nigeria’s manufacturing sector as an untapped gold mine that could be answer to the country’s quest for improved foreign exchange earnings apart from the sale of crude oil that is currently the mainstay of Nigeria’s foreign exchange supply.

It stated that based on nominal GDP figures released by the National Bureau of Statistics (NBS), Nigeria’s manufacturing sector was valued at N19.54 trillion in 2020 against N16.78 trillion it commanded in 2019.

Similarly, the manufacturing sector’s share of nominal GDP was below 10 per cent between 2015 and 2018 despite improving economic growth figures. But its share of the GDP increased to 11.6 per cent in 2019 and 12.8 per cent in 2020. The increase in 2020 was attributed mainly to high inflationary rate and large decline in the output of critical sectors as a result of the restrictions placed to control the spread of COVID-19 pandemic disease.

But the NESG, however, warned that opportunities are not enough to attract significant investment into the Nigerian manufacturing sector, especially given the country’s history of policy inconsistency.

x

It said: “To attract significant investments and narrow the gap between potential and actual investments, federal government support for the sector is of utmost importance. Drawing from the experience of the few sub-sectors in manufacturing that have attracted investments in the last few decades, government support in the form of developing sector plans and intervening to resolve specific challenges faced by investors in the sector have been instrumental in attracting investment.

“When these two conditions are available, investors are more assured to make significant investments amidst structural challenges such as inadequate power supply and infrastructure deficit. Even when issues of policy inconsistency and regulatory heavy-handedness arise, they are often resolved while investors are protected by the government.

“A clear example is the development of the National Sugar Master Plan (NSMP) in 2012 and the commitment of the federal government to ensure self-sufficiency in the sugar industry. According to the National Sugar Development Council, over N157 billion has been invested in the sugar sector through the backward integration strategy since the implementation of the plan Master Plan.

“Industries such as cement and motor vehicles have also benefited from government’s commitments, which are often shown by import restrictions, access to foreign exchange, industry coordination and political support from the Presidency,” the NESG report said.

x


Receive News Alerts on Whatsapp: +2348136370421

No comments yet