Inflation in Nigeria is driven by a myriad of issues ranging from the COVID-19 pandemic to the current global food crisis, and Russia’s invasion of Ukraine, among others. The current inflation rate in the country is 19.64%, which is the highest since 2017 when it was 18.72%.
In March 2022, the World Bank revealed that the high inflation rate in the country has pushed an additional 5 million people into poverty, bringing the total number of poor people to 95 million (48% of the total population).
This is due to the deteriorating purchasing power of the Naira which makes it increasingly difficult for people to afford basic necessities.
The Major Factors Pushing the Inflation Rate Up
As earlier stated, Nigeria’s inflation has been caused by a multitude of factors, both domestic and international. These include the COVID 19 (coronavirus) pandemic, crash in the prices of commodities, and ongoing geopolitical tensions.
The COVID-19 pandemic hit Nigeria in 2020. In response, the government declared a nationwide lockdown. The lockdown affected business operations and activities, causing supply chain disruptions that inevitably crippled the economy due to decreased production, decreased tax revenues, and increased spending by the government.
With most businesses shut down, the country faced significant scarcity of goods. However, as demand for these goods increased with little or no increase in supply, there was a hike in the general price level of goods and services, which jacked up inflation.
Although the lockdown gradually eased after a few months, the halt in production had a lingering effect beyond the end of the official lockdown. More so, halts in global production (especially in China, which is a leading exporter to Nigeria) further worsened the availability, and price, of various goods, including finished goods and key inputs for local industries.
Beyond domestic realities, the pandemic caused a sudden crash in oil prices, with the price per barrel decreasing from $51.25 in February 2020 to $21.78 in April 2020. This amounts to a 57.5% decrease from pre-pandemic levels. The sudden price shock affected Nigeria’s fiscal and monetary stability considering that oil accounts for 90% of Nigeria’s foreign exchange as well as nearly half of the government’s revenues.
With forex inflow dwindling amidst continued demand for imports - everything from wheat to spare parts - the Naira further shed its value, thereby spurring an increase in the price of imported goods.
Other than the pandemic, the current state of insecurity in Nigeria due to banditry, farmer-herdsmen clashes, and terrorism has also contributed to the soaring inflation rate. Rising insecurity has hindered agricultural production as farmers avoid their farms for safety reasons.
The security situation has also caused a hike in road transportation costs – to move food produce from rural to suburban/urban areas – increasing the food inflation rate from 19.5% in May 2022 to 20.6% in June 2022.
Finally, the ongoing Russia-Ukraine war, which began in February, led to supply shocks in food and energy. Both countries are responsible for nearly 30% in global wheat exports. The sudden supply shock has also fueled the growing inflation rate since Nigeria depends on imports for nearly 96% of its wheat consumption.
The war resulted in higher prices of commodities (such as wheat, maize, crude oil, natural gas, coal, fertilizers, and others) due to disruptions in production activities, a blockade of Ukrainian ports, and crushing sanctions against Russian exports.
In addition to soaring food prices, oil prices - which were $96 per barrel before the Russian invasion - have increased by 15% and are currently at $110 per barrel.
You’d think that Nigeria is benefiting from this, right? Unfortunately, we aren’t.
Nigeria heavily subsidizes petrol, and as crude oil prices increase, the price of petrol increases, leading the country to pay more for petrol subsidy. This offsets any benefit it could get from the increase in crude oil prices.
In 2022, Nigeria is expected to spend nearly $9.6 billion. This amounts to an estimated $4.8 billion (at least N2 trillion) in the first half of the year. This adds to mounting challenges in the sector, including dwindling investments and the worsening spate of crude oil theft which has cost the country nearly 24 million barrels of oil ($2.4 billion) since January.
What are the Implications of This?
Due to the spike in energy prices, the cost of transportation is higher. Petrol, diesel, and aviation fuel are now more expensive. As an oil producing country, we should not be experiencing this. However, the absence of local refining capacity means that we are exposed to these spikes.
The higher energy prices have caused airlines, such as Dana Airline and Aero Contractors, to shut down as a result of rising operating costs. This means that people traveling now pay higher transportation fares.
More so, higher energy prices directly translate to increased cost of transportation for goods, which worsens an already bad inflation. This has led to a general increase in the cost of production of businesses and therefore reduced their output and revenue.
The ever-rising inflation rate will cause people to pay more for goods. This would mean rising poverty levels and lower quality of life. Beyond its economic impact, rising poverty levels could threaten an already fragile security situation in the country.
There is an increased risk of youths being targeted by terror and bandit groups. This could lead the country into an endless vicious cycle that might be hard to escape from. Suffice to say that the ongoing inflation crisis is more than an economic crisis. It has political and security consequences.
The country is currently in a tough spot. Nigeria’s inflation problem is largely from supply side constraints. There has been a shortfall in supply, vis-à-vis demand. This is most attributable to the growing cost of production.
It therefore becomes important that modalities be put in place to ensure that there is an increase in productivity in the economy. These would include a more realistic monetary policy, as well as reduction in redtapes for small businesses, among others.