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After months of relief, soaring energy prices raise inflation fears

By Femi Adekoya
14 March 2022   |   4:25 am
fter months of relief from spiking inflation, Nigerians may have to brace for another round of prolonged rise in food, transportation and energy prices triggered by Russia’s invasion of Ukraine, as many key producing countries keep vital food...

PHOTO: StarTribune

• As countries ban food, raw materials export
• At over N700 per litre, diesel becoming scarce, firms struggle to sustain operations
• War between Ukraine/Russia will make hunger crisis tougher to fight, says Olawale-Cole

After months of relief from spiking inflation, Nigerians may have to brace for another round of prolonged rise in food, transportation and energy prices triggered by Russia’s invasion of Ukraine, as many key producing countries keep vital food supplies within their borders under an export ban.

While Nigeria may have been omitted from Russia’s ‘unfriendly list’ as the Eastern European country moves to ban exports to 48 countries till December 2022, other countries are reducing export of certain products to ensure food security and hedge against inflation.

Already, the conflict in Ukraine is threatening global grain production, the supply of edible oils and fertiliser exports, making basic commodity prices rocketing and mirroring the crisis in energy markets.

Locally, energy costs are beginning to affect logistics business, transportation costs, manufacturing sector and the real estate sector, as the cost of diesel skyrockets daily.

At the weekend, the price of diesel rose as much as N700 per litre in many places, weakening companies dependent on the fuel rally to sustain operations. Also, passenger buses like the Lagos Bus Rapid Transit (BRT) were fewer on the road due to cost and availability of diesel.

Meanwhile, domestic airlines are currently groaning under acute scarcity of aviation fuel, popularly called Jet A1, with only few operators getting supplies from marketers. The price of Jet A1 has been oscillating between N580 and N600 per litre in the last few days, compared to the N450, which it was previously sold.

The rise in prices comes at a time when affordability of food is a major challenge as economies seek to recover from the coronavirus crisis and is also helping to fuel a broader surge in inflation across the globe.

According to January data from the National Bureau of Statistics (NBS), food inflation eased by 24 basis points to 17.13 per cent compared to 17.37 per cent.

Notably, food inflation pressures were most significant in the prices of Bread and cereals, Potatoes, yam and other tubers, Soft drinks, Oils and fats, and fruit.

On a month-on-month basis, food inflation rose by 1.62 per cent, relative to the 2.19 per cent recorded in December 2021.

Indonesia, last week, announced curbs on palm oil exports; Ukraine also banned some agricultural exports including, barley, sugar and meat until the end of the year.

Serbia also announced it would ban exports of wheat, corn, flour and cooking oil as of Thursday to counter price increases, while Hungary banned all grain exports last week.

Bulgaria has also announced it will increase its grain reserves and might restrict exports until it has carried out planned purchases. Grain supplies in Romania, a major exporter, have also tightened as international buyers seek alternatives to Russia or Ukrainian supplies, although there are currently no plans to restrict shipments.

The conflict has not only disrupted shipments from the Black Sea region but is also jeopardising prospects for harvests as fertiliser prices soar and supplies shrink in response to a sharp rise in the cost of natural gas – a key component in the manufacturing process for many products.

World food prices rose to a record high in February to post a year-on-year increase of 20.7 per cent, according to the FAO, while many markets have continued to climb this month.

With the Russia/Ukraine conflict’s intensity and duration uncertain, “the likely disruptions to agricultural activities of these two major exporters of staple commodities could seriously escalate food insecurity globally, when international food and input prices are already high and vulnerable,” said Qu Dongyu, director-general of the Rome-based Food and Agriculture Organisation (FAO).

For Nigeria, the ongoing conflict is putting pressure on local prices of food and services and compounding the nation’s woes both at the upstream and downstream sectors of the economy.

Considering that the nation depends mostly on importation for its raw materials and fuel, there are concerns about the impact on certain food items for which critical raw materials export have been curtailed.

Indeed, insecurity and climate change effects in parts of the country have also undermined the capacity to improve production of food.

The Lagos Chamber of Commerce and Industry (LCCI) noted that the war between Ukraine and Russia would likely make the world’s hunger crisis even tougher to fight.

The LCCI noted that it is unclear how long the current disruptions in the food supply chain will last, though it has already triggered higher wheat prices around the world.

“In developing economies including Nigeria, where populations already struggle to afford food, disruptions to food supply may result in substantial additional hardship and instability. The government, at all levels, at this time, should open up their reserves (if there are any) to boost supply to stabilise prices at least in the short term. Alternatively, the government should intervene by way of initiating imports from other sources outside the war zones”, says the LCCI President, Dr Michael Olawale-Cole.

He added that the most sustainable solution is for the government to boost local production of these staples to levels that meet local demand, as the world economy is already feeling the impact of the disruptions caused by the war on global supply chains.

“In preparing for the reality of our near future, we urge the Federal Government to take seriously the completion of projects like the Trans-Saharan Gas Pipeline, a planned natural gas pipeline from Nigeria to Algeria. With this, we can explore the opportunity of exporting gas to Europe.

“We should also target Trans-Saharan and European markets with the ongoing construction of the Ajaokuta, Kaduna, Kano Gas Pipeline, popularly known as AKK Gas Pipeline. Arising from the calamities of this war, Nigeria can explore emerging opportunities to earn huge foreign exchange inflow in the medium to long-term,” he added.

With escalating cost of production arising from elevated energy costs, rising operating expenses, sharp currency depreciation, forex market illiquidity, galloping inflation and numerous structural bottlenecks, the Centre for the Promotion of Private Enterprise (CPPE) has asked the Federal Government to suspend the planned imposition of excise duties on manufacturers.

According to the CPPE, the cost of energy, logistics and present export ban, which also limits access to raw materials make it imperative to give the sector stimulus and not more taxes.

“A huge proportion of these costs cannot be passed on to the consumers because of weak purchasing power and high consumer resistance. Given the strategic importance of manufacturing to the Nigerian economy, what the sector needs at this time is more stimulus, and not more taxes,” CPPE Director-General, Dr Muda Yusuf said.

According to the Manufacturers Association of Nigeria (MAN), the rising cost of production has made its members consider the renewable energy alternative offered through the Sustainable Use of Natural Resources and Energy Finance (SUNREF), a green financing line for businesses developed by the French Development Agency (AFD).

Already, MAN and AFD have put together an $81m funding scheme for the development of renewable energy and the energy efficiency sector in Nigeria.