Rising prices weaken disposable incomes despite easing inflation
• Inflation in May stood at 17.93%, still among highest in four years
• Inflation pushed seven million people into poverty in 2020, says World Bank
• Critical reforms needed to reduce inflation, accelerate recovery
• FG urged to liberalise NAFEX window, remove fuel subsidy totally
As Nigeria’s headline inflation retreated for the second time in May, dropping from 18.12 per cent reported in April to 17.93 per cent, the realities in the markets in terms of food prices and consumer goods, continue to pose challenges to many Nigerians whose disposable incomes have weakened.
From a month on month perspective, inflation accelerated across all parameters, underscoring the fact that inflation remains a major challenge to investors and citizens. The new figure is contained in the Consumer Price Index (CPI), which measures changes in price levels over time, as released by the National Bureau of Statistics (NBS) yesterday.
Inflationary pressures have not abated since government announced a shutdown of Nigeria’s porous land borders in October 2019 in a move to spur mass production of food as well as curb smuggling. However, attacks on farms, forex scarcity and naira devaluation have contributed to seeing local food demand outweigh production, causing food prices to steadily rise.
According to members of the Organised Private Sector (OPS), inflation is perhaps the biggest poverty accelerator because of its weakening of purchasing power. “It weakens real income, erodes purchasing power, puts pressure on operating costs, aggravates production costs, reduces sales and negatively impacts profit margins across sectors,” the Director-General of the Lagos Chamber of Commerce and Industry (LCCI), Dr. Muda Yusuf, said.
The position of LCCI was re-echoed by the World Bank in its Nigeria Development Update (NDU), noting that surging inflation is undermining the recovery of Nigeria’s economy, pushing at least seven million Nigerians into poverty and encouraging criminality as rising prices deplete already meager incomes.
According to the latest NDU titled: ‘Resilience through Reforms,’ the development finance institution raised concerns about the impact of rising cost of goods on many households.
The NDU reveals rising inflation has pushed an estimated seven million Nigerians below the poverty line in 2020 alone. According to the report, rise in inflationary pressure has been driven primarily by surging food prices, as Nigeria’s rate of inflation rose steadily throughout 2020 and reached a four-year high in March 2021.
Nigeria’s headline inflation rate rose from 11.98 per cent as of December 2019 to 15.75 per cent at the end of 2020, and was at 18.12 per cent as of April 2021, while food inflation stood at 22.72 per cent.
With a negative inflation rate of 0.44 per cent Month-on-Month (MoM), the food inflation also dropped marginally from 22.72 per cent year-on-year to 22.28 per cent in May, whereas all items, less farm produce category, rose from 12.74 per cent to 13.15 per cent. At 18.51 per cent, the urban inflation, as in the previous months, was faster than that of rural areas, which stood at 17.36 per cent.
Across board, the highest increase was recorded in oil/fat, fish, fruits, soft drinks, milk/cheese/egg, meat, vegetable, bread/cereals and coffee/tea/cocoa. Hospital services, shoes/footwear, pharmaceuticals, motorcars, gas, cement, among others, drove core inflation, according to the report.
Experts had predicted a faster inflation rate in May as prices of major commodities increased across different markets.
Time series analysis and regression results of some local research organisations had pointed to higher inflation. The LCCI DG noted that the drivers of inflation had remained largely the same and were mainly supply side issues.
“These issues include security situation, cost of transportation and logistics, energy costs, exchange rate depreciation, illiquidity in forex market, climate change, among other variables. Tackling inflation would require fixing these supply side challenges,” he added.
A professor of applied economics and researcher, Godwin Owoh, said the figures were contradictory to reality and grossly underestimated to achieve certain pre-conceived decisions for political gain.
“Unfortunately, the NBS is the only organisation that can pronounce inflation rate, otherwise, the figures are grossly underestimated. Take one or two empirical examples to test the figures that have been communicated officially. The World Bank took inputs from independent professionals, and it was proven that the inflation figures are wrong.
“The inflation rate is between the range of 26 and 28 per cent. There is a relationship between the rate of inflation and unemployment. Once there is no econometric alignment when you compute the two, you know there is figure manipulation to arrive at a predetermined decision for a political reason,” Owoh said.
Indeed, the NDU also proposes near-term policy option organised around three priority objectives: reduce inflation by implementing policies that support macroeconomic stability, inclusive growth, and job creation; protect poor households from the impacts of inflation; facilitate access to financing for small and medium enterprises in key sectors to mitigate the effects of inflation and accelerate the recovery.
The report acknowledged notable government’s policy reforms aimed at mitigating the impact of the crisis and supporting the recovery; including steps taken towards reducing gasoline subsidies and adjusting electricity tariffs towards more cost-reflective levels, both supposedly aimed at expanding the fiscal space for pro-poor spending.
The report however, noted that despite the more favourable external environment, with recovering oil prices and growth in advanced economies, a failure to sustain and deepen reforms would threaten both macroeconomic sustainability and policy credibility, thereby limiting the government’s ability to address gaps in human and physical capital, which is needed to attract private investment.
“Nigeria faces interlinked challenges in relation to inflation, limited job opportunities, and insecurity”, said Shubham Chaudhuri, the World Bank Country Director for Nigeria.
“While the government has made efforts to reduce the effect of these by advancing long-delayed policy reforms, it is clear that these reforms will have to be sustained and deepened for Nigeria to realise its development potential.
“Given the urgency to reduce inflation amidst the pandemic, a policy consensus and expedited reform implementation on exchange-rate management, monetary policy, trade policy, fiscal policy, and social protection would help save lives, protect livelihoods, and ensure a faster and sustained recovery” said Marco Hernandez, the World Bank Lead Economist for Nigeria and co-author of the report.
MEANWHILE, as the country grapples with growth challenges, the World Bank listed tax as one of the options Nigeria has to raise revenues noting that this would help the country to run essential services, provide security to citizens, help tackle hunger and poverty, and deliver critical health and education services.
“Nigeria may be Africa’s biggest economy but at just four per cent, it has Africa’s lowest tax-to-GDP ratio. Together, the COVID-related economic slowdown and the steep fall in oil prices in 2020 brought into clear focus the need to increase non-oil revenue even when investment, jobs and growth also need to increase. This calls for a carefully calibrated set of policy and administrative measures that can grow revenues without discouraging investment. That rules out any increases in traditional ad valorem taxes like the value-added tax but it does afford an opportunity to fully apply tax policies already adopted and reform tax administration to seal compliance gaps,” the bank noted.
On Ways and Means (W & M) advances, the World Bank suggested: “To help control growth of the money supply, establish mechanisms to monitor and report the Federal Government’s stock of CBN overdrafts, identify more flexible options for borrowing to finance the Federal Government deficit, totally eliminate the fuel subsidy, design a sequence of reforms to mobilise domestic non-oil revenue in a way that does not affect the recovery of the economy, such as increasing ‘sin taxes’ charging fees for electronic money transfers, rationalising tax expenditures, removing loopholes in tax laws and improving tax compliance by building up revenue administration.”
The institution also charged the country to clearly “define policy priorities and objectives, with price stability specified as the primary goal.”
It also called on the Central bank of Nigeria (CBN) to resume naira-denominated open-market operations (OMOs) based on a transparent issuance schedule and signal to markets that OMOs will use short-maturity securities to control banking system liquidity. It advised CBN to reduce subsidised lending to medium and large corporations, expand the scope for commercial banks to intermediate funds at a risk-adjusted lending rate while phasing out excessive reliance on the cash-reserve ratio as a high-frequency liquidity control tool and an instrument to finance quasi-fiscal CBN operations.