Analysis: Why Nigeria Must Tackle Food, Essential Commodities Inflation before 2022

Africa’s most populous country, Nigeria, has been at the centre of several challenges, from economic to security, which has had an effect on its socio-economic well-being.

Nigeria’s inflation rate is over 16% and the country has continued to battle with the increase in prices of essential commodities.

The World Bank also noted that 91 million Nigerians may be pushed under the poverty level due to rising inflation.

With the country battling poverty and rising costs of living, another noose looms as a decision has been reached that subsidizing Petroleum Motor Spirit, popularly called petrol is no longer sustainable and so all PMS subsidies will be removed by 2022.

It is important for Nigeria to tackle its rising inflation before 2022, which looms all of two weeks away

Inflation is simply a general increase in prices and a fall in the value of money. An increase in production cost can lead to inflation, a surge in demand in comparison with available supply can also lead to inflation. The International Monetary Fund noted that inflation is measured by the increase in prices over a certain period of time.

Already, Nigerians are paying more for essential commodities, insecurity such as clashes between farmers and herders, climate change, among others are blamed for the increase in the price of food items. 

If the current inflation remains into 2022, there is little doubt that there would be an increase in economic hardship and Nigerians may find it more expensive and harder to survive.

The Petrol Subsidy Removal Ripple

A report had noted that the daily consumption of Petroleum in Nigeria stands at 72 million litres a day. Petrol is an important product in the daily lives of Nigerians, not just for transportation but for other activities such as electricity generation for manufacturing purposes, given the poor state of electricity in the country.

The implication of the removal of subsidy is that the 72 million litres of petroleum will likely cost more depending on the international market prevailing price. The government’s projection is that the price of petroleum will likely sky-rocket to N340/litre.

Different reports have revealed how motorists increase transport fares due to an increase in the price of petroleum. The Nigerian Bureau of Statistics puts the Vehicle population of Nigeria as of 2018 at 11.7 million.

If the belief that private car owners are not among the poor Nigerians and sentiments that they can ‘afford’ to pay for an increased fuel price stands, the economic considerations involved for 6.7 million commercial vehicles cannot be neglected and based on precedence, data, these set will increase their transport fare nationwide. This is also because they are now spending more as production cost/input.

Transportation is an essential activity and with road transportation, especially vehicles being the most relied upon, it means that surviving through going to office places, markets, social visits, religious centres among others will become costlier. 

Perhaps this is why the Federal Government’s plan for offsetting the effect of subsidy removal is to give out a N5000 transport stipend to 40 million poor Nigerians. This decision has been heavily criticized by stakeholders. The common threads of thought among experts include that it makes no economic sense to replace one subsidy for another, how exactly did they arrive at a 40 million figure of poor Nigerians. The most echoed thought on the government’s plan is that it is shortsighted and not well thought out because the effect of subsidy removal will not only be felt in transportation.

While transportation will be affected, it is not only end-use of transportation like the ones mentioned that suffers, transportation especially vehicular, powers many businesses in Nigeria from agricultural to other forms of manufacturing. Vehicular transportation is in fact the most used for logistics. An increase in PMS costs will have a profound effect on businesses that rely on transportation across the value chain in their business. In Nigeria, a lot of businesses are in this category.

Nigeria will be dealing with Cost-push inflation in 2022. Cost-Push inflation occurs due to an increase in wages and raw materials (such as petroleum), pushing up the cost of production.

PMS is the primary source of power generation in Nigeria. Over 20 years of unbroken democracy in Nigeria and the problem of power has remained intractable. Businesses are forced to generate their own power with generators that are mostly powered by petrol. Small and medium businesses are especially vulnerable to fluctuations in the cost of petroleum as there is a direct correlation between the cost of production and the cost of power generation. 

Already, power has been identified as one of the biggest hurdles to scaling up small businesses in Nigeria. The country was listed among the top six users of backup generators in 2019 with India, Iraq, Pakistan, Venezuela also taking place.

An increase in the cost of petroleum is guaranteed to increase the cost of production and manufacturing which will, in turn, affect the cost of goods and services and further drive up an already unconscionably high cost of living for Nigerians.

Imagine a juice making factory in the FCT that runs 18-hour days on generators. The factory sources its fruits from the food basket of the nation, Benue State. As soon as PMS costs go up, the factory will pay more to receive the exact same amount of fruits from Benue state and pay higher to process the same amount of fruits into juices. 

Junior and his two sisters love juices from the juice factory, so their mom, a middle management executive with an MSME, buys two boxes that usually last them 2 months. As soon as PMS costs go up, juice prices go up and Junior’s mom has to buy 2 juice boxes for the price of four because it is more expensive. But that’s not the only thing that is more expensive, Junior’s biscuits, school supplies, cereals have all gone up. Retailers are forced to increase their prices, as a way to make a profit.

Meanwhile, Junior’s mom has not received a salary increase in two years and she is not likely to receive any soon because the cost of doing business for her MSME has also gone up. In fact, she stands the risk of losing her job as do the many Nigerians working with MSMEs.

A survey by the Nigerian Bureau of Statistics in collaboration with the Micro, Small and Medium Scale Enterprises, published in 2015, showed that there were 37 million MSMEs in Nigeria. In the survey, 59 million persons were recorded employed by MSMEs representing over 84% of the labour force of the country as at then.

A survey by PWC in 2020 noted that obtaining finance at 22%,  infrastructure deficit at 15% (electricity, transport deficiencies) topped challenges faced by MSMEs in Nigeria and these issues may not only top but topple many businesses when subsidy removal is piled on top of all the other challenges.

There is a possibility that SMEs that account for the majority of jobs in Nigeria will be threatened as rise in production costs may affect their sustainability.

Higher costs will also reduce the supply in the country. Apart from consumers having to pay more if the cost of production increases, the reduction in supply from firms due to higher costs of production will mean, if there is more demand, there will be less supply to meet up.

Already, Nigeria is suffering from a shortage of essential commodities, some of which are blamed on the cost of storage, processing, transportation, marketing; all of which will likely increase in 2022. Insecurity has further hampered local production in Nigeria,  with wheat importation at an all-time high.

This will reduce the already reduced (due to current inflation) value of Naira in the market and Nigeria may be gearing for ‘higher inflation’ if there is no reduction in current inflation and the economic shake-down due to COVID-19 stands. 

This is how to think about the impact of an increment in fuel prices and so the announcement of a transport subsidy for the poor is a mere drop in a basket full of holes.

High cost of goods and services, multiple taxations, devalued currency, reduced purchasing power, layered on top of insecurity is the perfect recipe for making the poor even poorer.

The COVID-19, Travel Ban Complication

In Nigeria, COVID-19 has been blamed for job losses and the rise in inflation, even the Nigerian government blamed COVID-19 for rising in the price of Cement for instance. 

With the Covid-19 threat still hanging over the world and the discovery of new variants like the Omicron, and travel bans and threats of shutdowns, it is increasingly clear that countries must have a long-term outlook on dealing with the pandemic and its farreaching effects. 

Already, Nigeria has been at the receiving end of travel bans from Canada, United Kingdom, after the discovery of the Omicron variant COVID.

The already embattled Travel sector will suffer from these bans even more. The International Air Transport Association in 2020 noted that 124,000 jobs were at stake during COVID-19 and noted that the contribution of the Aviation sector to the GDP estimated at around $1.7 billion was threatened.

This is outside the impact of such bans on global supply and logistics which is still yet to recover from the 2020 shutdowns. Key imports that aid production in Nigeria will suffer greatly.

Nigeria cannot afford the spread of the Omicron variant, asides from the weakness of the country’s health infrastructure, it could lead to speculative inflation. Where Nigeria fails to contain the Omicron variant enough to avoid shutdown (partial or full), it may lead to panic buying and this will lead to a surge in demand which may inadvertently increase prices, thereby putting pressure on the economy and market.

Inflating the already Inflated May Heat up the Polity

There is no doubt that if the current inflation remains and the inflated prices are inflated further in 2022, there might be even more unrest in the country.

Already, bodies such as the Nigerian Labour congress have rejected plans to pay the N5000 stipend to Nigerians as a palliative for Transport. The body argues that such removal of subsidies will aggravate the poor conditions of the country and lead to hyperinflation. 

The government needs strategies to nip these buds before they further widen the net of inflationary discomfort especially as it is keen on subsidy removal.

Measures to Tackle Inflation, Promote Stability 

The Lead Partner, Sustainable Entrepreneurship and Economic Development Initiative, (SEEDI) Celestine Okeke told Dataphyte that the problem of Nigeria is the failure of its key economic indicators.

He noted that Nigeria’s overreliance on importation and minimal productivity increases the cost of production.

Celestine noted that Nigeria must first understand its key problems before deploying solutions.

He further recommended investments in key infrastructures such as roads, electricity to ensure that productivity is encouraged. 

The development expert also warned that the effect of sustained inflation will be high on small businesses while urging the government to prioritize the appropriate policies and understand where interventions are necessary.

While noting that development is sequential, he stated the need to begin taking actions that can tone down inflation.  According to him, no country in one swoop reduces the cost of production but deploying actions that translate into gradual solutions remain key.

Oil and Gas policy expert, Oyinda Adedokun while speaking with Dataphyte blamed policies of the NNPC that puts pressure on the economic health of the country and forms part of the reasons for inflation.

She revealed for instance that oil marketers are expected to pay the Nigerian Ports Authority charge and one other charge in Dollars. She noted that efforts of the government to change this policy even when the former Chief of Staff to the President, Late Abba Kyari, signed a document asking that these charges be paid in Naira proved abortive as the orders were flouted.

She noted that much pressure on the Naira through huge demands for Dollars even within the country’s internal transactions affects essential produce too, citing an instance of fertilizers for farm produce. 

She urged that policies such as this should be curbed to ensure that transactionary inflation is checked. According to her, this is a key policy challenge to checkmate.

Another policy expert, Henry Adigun while weighing in on the development noted that subsidy is not the issue in Nigeria.

He opined that what Nigeria subsidizes is a major concern, noting that other countries of the world subsidize one sector or the other. He encouraged that the country should subsidize sectors that help the average Nigerian have more purchasing power. He noted that other key sectors such as education, agriculture, are among those that will help Nigerians have better value for money.

He also noted that Nigeria must tackle rising insecurity to ensure that the economy is not crippled, according to him, insecurity is a major driver of poverty and inflation and as such must be tackled for the country to record meaningful progress.