The World Bank recently reported that inflationary pressure in Nigeria has pushed about seven million Nigerians below the poverty line in 2020 alone. The revelation, which was contained in the bank’s latest report on Nigeria titled, ‘Nigeria Development Update: Resilience through Reforms’, was released about two weeks ago.
The bank’s report also noted the capacity of a high inflation rate, which will worsen poverty and undermine business activities in the country.
The inflation rate is one of the critical macroeconomic indices used to ascertain the health and well-being of an economy. In a country plagued by insecurity, rising prices and slow economic development, inflationary pressures will remain high. The recent high costs of living in Nigeria no doubt has stretched the people’s patience to the limits.
Nigeria’s inflation basket has been captured several times to indicate the rapidly changing consumption patterns of the people. The last revision of the country’s inflation basket was in 2009, which raised concerns about the impact of inflation in policy decision-making.
According to a recent statement released by the National Bureau of Statistics (NBS), Nigeria’s inflation rate stood at 18.12 per cent in April 2021, indicating the first decline in headline inflation in about 20 months. This surely has some effect on the growth and development of the economy. Research has shown that inflation in Nigeria is largely driven by food prices which have increased steadily since the country’s land borders were closed in August 2019.
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The situation is further aggravated by currency pressure, insecurity, and a host of other factors including the country’s debt profile of about $150 billion. Ninety (90) million people in the poverty bracket with seven (7) million added to the bracket, according to the World Bank. This is corroborated by World Poverty Clock which revealed that many Nigerians are living below two dollars a day. The unemployment rate is 33 percent. Youth unemployment and underemployment are about 42 percent and 22 percent, with 15 million children on the streets. We are close to a stage where we would say that we have lost a generation, just like former President of Liberia, Sirleaf Johnson, said of her country.
What we are facing now are rising prices which deplete income and erode purchasing power. In a recent Channels TV programme, ‘Sunrise’, Nigerians were shown some public markets where tubers of yams were being sold in slices. One wonders the extent to which monetary policy can deal with what the country is facing today. There are issues surrounding money supply in our monetary and fiscal policies, although there is a reduction in interest rates for fixed deposits, treasury bills, and others.
The factors that affect our foreign exchange are exogenous to our system. About 90 percent of forex is dependent on crude oil production, and we have very little control of that. When there is a shortage of forex, importers go to the black market and obtain forex with which they bring in commodities at high costs and pass on to the consumers. Now, people buy dollars and keep them, as the dollar is becoming a product. The price of the dollar will naturally go high, and the same currency is needed to import PMS.
This amounts to systematic exploitation by both the government and a few privileged citizens. With too much money in circulation, what is supposed to be channelled to productive purposes is used for consumption, and this makes prices go up, thereby causing inflation. Beyond monetary policy, which has its limits in tackling inflation, are structural factors. It is believed that the major driver of inflation in Nigeria, whether historically or in contemporary times, is our food basket. In 2019, it was estimated that food took about 56.6 percent of household expenditure. Experts put the food basket index at 22.72 percent and the core index at 12.74 percent, leaving a gap of 10 percent margin of farm produce. This suggests that once food price is on the increase, inflation will also increase. There is a direct relationship.
There are the demand and supply sides of farm produce. On the demand side of agriculture, Nigeria is feeding over 300 million people while its population is about 200 million. Almost the entire West African sub-region is dependent on the Nigerian food market. They are protected by the ECOWAS treaty of free movement of primary produce without paying tax, while paying for the product in naira and not in dollar. Apart from the farm produce, the quantum of finished goods that these countries buy is significant.
About five years ago, N1 was buying 3 CFA but now N1 is buying about 1.2 CFA. This shows that in the eye of the Francophone countries surrounding Nigeria, the naira has been devalued by over 67 percent. As a result, there is no incentive for them to grow anything anymore. They buy Nigerian produce and bring it back to us three or four months later and sell it at about 100 per cent of the price. Available statistics show inflation figures that indicate a turn in the food inflation rate from about 22.93 percent in March, 22.7 percent in April, to 22.28 percent in May. We are seeing a reflection of that downward movement in headline inflation from 18.17 percent, 18.12 percent to 17.93 percent. These are principally driven by the decline in the food basket.
We have gone this path before, as models of inflation have evolved. Headline inflation was 15.9 percent in 2017. Food inflation was 23 percent, while we have 22.9 percent now. There are other structural factors. The shortage of power and the damage it does to the economy through tariff hikes and other input costs are devastating. About 30 percent of input cost is attributed to power. Transport, which constitutes about 20 percent of input cost, is dependent on the rising price of PMS. There are also the Covid-19 pandemic and the pervasive impact of insecurity on all factors of production.
It is reported that some lands provided by both the federal and state ministries of agriculture are very expensive compared to those of other land speculators. Besides, many farmers are denied access to their farms and they have no means of repaying their loans. Farming is under siege. Farmers/herders’ crisis is worsened by the government’s determination to reopen grazing routes. These factors and other bad economic policies have driven over 100 million Nigerians into poverty, with over 80 million captured below the poverty line.
There are critical steps in the area of reforms to be taken if the country must deal decisively with inflation. It is a good economic situation to have high demand. When supply meets demand, it increases wealth. What needs to be done is calibrate the system to meet the demands of other countries, especially in the sub-region.
There are expected measures to reduce domestic costs. It is good to know that in the new Finance Act of 2020, duties on tractors were reduced from 35 percent to 10 percent. The levy on motor vehicles for transportation of persons was also brought down from 25 percent to 5 percent. But the government needs to do more to move from relief-focused poverty alleviation to development-focused poverty alleviation. China did it in 1982 and today, they are better for it.
The medium and small-scale industries should be supported to reduce urban inflation, which is most times higher than rural inflation. In addressing money supply issues, forex funding (not cheap forex) should be encouraged so that access to funding will be at a relatively cheaper rate. This is capable of stemming the upsurge in the volume of imported raw materials and improving the consumption of locally manufactured items in line with the policy of backward integration.
Attention should shift towards diversifying the agricultural mix and boosting food production. Farmers can be given direction on the contemporary ways of farming. This can be done by extension workers who may be local residents that understand the culture, attitude of the people, or history of farming in that area.
On a broader scale, farm estates should be encouraged by adopting mechanisation and improved technology used to produce high-yield seeds that can enhance productivity. Vertical farming can be promoted, as it utilises little space for maximum yield per hectare.
The federal government does not own specific lands within the sub-national space. What is needed is the synchronisation of policies between the federal, state, and local governments. The sub-nationals should be involved in this as a deliberate policy of state because, by constitutional provision, they are the custodians of the land. The local government has been out of the loop in the agricultural value chain. They are the closest to the people, and there are about 450 local government areas that are rural-based. Whatever structure we have, without the functionality of the local government, we will still be grasping at non-issues.
The current inflationary pressure can only produce inverted economic results, and if left unchecked, could undermine national economic diversification and competitive domestic production.