Rising costs, supply chain disruptions worsen inflation


• May spiral out of control if triggers are not addressed, experts warn
• Higher interest rates heighten loan defaults, put banks at risk, says Moody’s
• ‘Worst yet to come unless govt contains importation’

At 20.52 per cent, representing the highest rate since September 2005 and still rising, Nigeria’s inflation rate may spiral above 50 per cent if prevailing socio-economic challenges and other triggers are not addressed within the shortest period, experts have warned.

While inflation concerns are not peculiar to Nigeria, the circumstances driving the surge are peculiar, especially, in the form of poor earnings from natural resources, as a result of theft, sabotage, insecurity and banditry, which have affected local production; foreign exchange concerns, huge expenditure and debt burden, among other challenges.

The new inflation rate raises concerns for Nigeria, placing pressure on the apex bank to increase interest rates, in desperate attempts to rein in rising prices.

Already, Moody’s new report says African banks will respond to the rising inflation and associated higher savings rates with an upward re-pricing of loans.

The response, the report foresees, would weaken borrowers’ capacity to repay existing loans and increase banks’ provisioning for loan loss. It, however, notes that most of the banks “took proactive provisions following the outbreak of the pandemic,” which will limit the extra provisioning required as defaults rise.  

“The impact on Nigerian and Kenyan banks’ margins will be muted because their interest rates are already high and some of their deposit rates are index-linked to the policy rate. African banks’ sizeable holdings of government debt securities will fall in value as interest rates rise, but these unrealised losses are unlikely to crystallise,” the Moody’s Corporation’s arm states.

In Nigeria, specifically, the report notes that large volumes of the loans are short-term; hence, they will be re-priced higher. This, it adds, could be constrained by already higher lending rates and stiff competition. 

Yesterday, data from the National Bureau of Statistics (NBS) showed that Nigeria’s inflation figure rose from 19.64 per cent recorded in July to 20.52 per cent.  

The Consumer Price Index (CPI) report by the NBS showed that Nigeria’s CPI rose by 1.77 per cent on a month-on-month basis, compared to the 1.82 per cent increase recorded in the previous month.
The report added that food inflation rose to 23.12 per cent in August 2022 on a year-on-year basis, representing a 2.82 per cent increase when compared to 20.30 per cent in August 2021.
“This rise was caused by increase in prices of bread and cereals, food products like potatoes, yam and other tubers, fish, meat, oil and fat,” the report said.
Prof. Uche Uwaleke said the 20.52 per cent year-on-year inflation increase was expected, adding that steps taken by the Central Bank of Nigeria (CBN) on monetary policy tightening stance alone may not assuage the situation.
Uwaleke, who is a professor of Economics at the Nasarawa State University. Keffi, Nasarawa State, said the increase in headline inflation above the psychological threshold of 20 per cent did not come as a surprise in view of the rising inflation trend in many economies, partly caused by the Russian-Ukrainian conflict.
He said it is interesting to note that the NBS, in its latest CPI report, provided a clue as to the major factors driving the inflationary pressure in Nigeria, namely supply disruptions and rising cost of production.

According to Uwaleke, in the light of this revelation, what becomes clear is that the recent monetary policy-tightening stance of the CBN alone may not address the challenge.

In his reaction, Chief Executive Officer, Dairy Hills Limited, Emmanuel Kelvin, insisted that the devaluation of the naira is largely responsible for the spiral inflation, which has reached above 20 per cent since 1996.

His argument: “August figures show that core inflation has crossed 20 per cent and food inflation hitting 23.12 per cent for the first time since 1996 when Nigeria’s inflation was at 47.56 per cent. This is a proof that the continual drop in the value of the naira is impacting heavily on cost of production across nearly 50 sectors that constitute the inflation basket.”

He observed that companies cannot access forex to import because NNPC has been unable to remit royalties as payments from its Joint Venture partners due to force majeures on production lines that have seen output drop to 972,000 barrels per day.  

He added that government needs to understand that one of a few credible solutions to solving its forex problem other than raising the quality and quantity of its exports, is the re-awakening of the Yuan swap deal it signed in April of 2018.

“Bifurcating your foreign reserves from the U.S. Federal Reserve to reflect the ratio of import to export trade relationship with China will provide the liquidity required to settle naira, Yuan swap transactions and eliminate the need for Nigerian traders converting to dollars before trading with China.

“A failure to implement these hard resets will see government reacting to the situation by having the MPC raise MPR to align the interest to the inflation curve, which will only make capital more expensive, and lead to a negative return on yield,” he stated.

For the CEO of Centre for the Promotion of Private Enterprise (CPPE) and former Director General of the Lagos Chamber of Commerce and Industry (LCCI), Dr Muda Yusuf, the heightened inflationary pressures in the economy remains troubling.

“The reality is that the major inflation drivers have not abated, if anything, some have become even more intense. These factors include high transportation costs, increasing logistics challenges, worsening exchange rate depreciation, forex liquidity issues, hike in energy prices, climate change issues, insecurity in many farming communities and structural bottlenecks to production. These are basically supply side issues.  

“The accelerated fiscal deficit financing by CBN is also a significant inflation driver. The financing of fiscal deficit has been elevated to disturbing levels at almost N20 trillion. This has huge implications for money supply and knock on effect on inflation. CBN financing of deficit is high-powered money and very inflationary. It is inflation tax.

“Mounting inflationary pressures weakens purchasing power of citizens as real incomes are eroded, it aggravates pressure on production costs, negatively impacts profitability, erodes shareholders value and undermines investors’ confidence. 

“In most cases, increases in production costs cannot be transferred to consumers by industrialists. The implication is that producers are also taking a major hit. This is more pronounced where the demand for the product is elastic. These are products that consumers can readily do without,” he said.  
On his part, the Director-General, Cross River Economic Summit Organisation, Johnson Ebokpo Jr., said the worst is yet to come as inflation would likely hit above 50 per cent in the next few months if the Federal Government does not take hard decisions.
He insisted that the current food and the inflation rate are not a reflection of Nigeria’s current realities and this is because the inflation is not induced by factors of demand but rather the supply side is a huge challenge.
His words: “Some of the factors propelling inflation pander around oil theft, which directly impacts on our foreign reserves with a corresponding attack on the country’s currency. The current price of diesel and aviation fuel has propelled an inflationary trend that is unimaginable at almost 300 per cent.

“I project that the headline inflation rate will move up to 50 per cent in line with current trends and especially as we head towards a post-nil fuel subsidy regime as part of the full implementation of the Petroleum Industry Act (PIA). This will impact the price of food items and other consumables such as diesel, aviation fuel and kerosene.”

He suggested that the models used to evaluate the different components of the monthly CPI need to be reviewed to reflect the current consumer spending patterns. Nigeria’s current rising inflation will continue as long as the country continues to rely heavily on the importation of most of its consumer goods.

A finance expert and Chairman, Financial Reporting Council, Dr Sam Nzekwe, said Nigeria cannot experience respite in terms of high inflation as long as the country is not involved in production activities.

He added: “Do you know that we import practically everything and to do so, you need forex? We officially have a shortage of forex, which is why the dollar is exchanging for almost N700 in the black market, and N435 in the official window. With that, you can’t bring down the price of goods.”

He added that there is also the issue of energy crisis, epileptic power supply that has forced few companies operating to depend more on diesel, which is also very expensive.

He advised that the government should take steps to encourage local production by providing the enabling environment for businesses to thrive.
Also speaking, National President, All Farmers Association of Nigeria (AFAN), Kabir Ibrahim, said the insecurity situation in the country, which has forced farmers to run from their farms, is the primary cause of the high cost of food in the market.

According to him, “as long as farmers cannot access their farms, we will continue to have food shortages. The President a few years ago gave the order for resuscitation of the strategic grains reserves, but that has not been done. I am aware that the government concessioned out the silos to private organisations. The government has not shown the political will to ensure that there’s food for citizens.”
Fiscal Policy Partner and Africa Tax Leader at PwC, Taiwo Oyedele, said to slow down the rate of inflation, government should improve security to enable farmers return to their farms while addressing the inefficiencies in the energy supply chain.
“There is also a need for relevant fiscal policy measures, such as suspension of the new excise duties on telecommunications services and non-alcoholic beverages, to complement the monetary policy measures aimed at controlling inflation.

“I will advise the MPC not to further increase MPR as doing so will only constrain the ability of businesses to fund their existing capacity and expansion needed to improve the supply side problem, thereby further fueling inflation rather than slowing it down.”

Speaking at a Stakeholders Dissemination Workshop on the Fiscal Impacts of COVID-19 Pandemic and Lessons for the Future, in Abuja, Chief Economic Adviser to the President, Doyin Salami, noted that the trillions of dollars spent by the global economy was causing a cascade of inflationary pressure and economic lockdown.

He pointed out that the development, playing out across the world, resulted from different shocks the world is facing, especially COVID-19 and immediate response from the war in Ukraine.

He explained that the challenges posed by the fallout of the two occurrences have strongly disrupted the global supply chain leading to increasing inflation across economies.

He said: “You cannot spend trillions of dollars expanding economies without expecting inflationary consequences. So, there was always going to be a rebalancing by Central Banks in particular and by fiscal authorities to the responses to COVID-19. So, that is in part what we are now seeing, that the world is now prioritizing inflation, and parts of the world economy are now in recession.”

He disclosed that the Federal Government was working to rebase Nigeria’s economy to reflect current realities. On his part, Prof. Adeola Adenikinju, Head of Department of Economics, University Ibadan, noted that the 2006 accounting matrix for Nigeria is obsolete, given the changes in the economy.

The nation’s Social Accounting Matrix (SAM), a comprehensive and economy-wide database that records data about all transactions between economic agents in a specific economy for a specific period of time, he said, is obsolete.


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