The old inflation playbook no longer applies to Nigeria as increased dependence on imports coupled with the pandemic-induced supply chain disruptions would continue to deter Nigeria from achieving single-digit inflation in the medium-term (5 years).
The blueprint of Nigeria’s sustainable economic growth was premised on the foundation of a single-digit inflation threshold. The last 7 years have however dashed the country’s hope for single-digit inflation.
While recovery from the pandemic in 2021 looked promising with GDP rising above 4 percent and inflation rate declining for 8 consecutive months; Nigeria’s headline inflation however, did not shed adequate light on the full story as global inflation has become a consequence of an unexpectedly strong rebound in global demand against a backdrop of multiple supply-chain constraints.
Central banks globally (CBN included) are facing criticisms that they have lost control, politicians are blamed for the current cost of living crisis and households sit at the sharp end, having to juggle higher food, fuel, energy, housing and general prices in a still uncertain economic environment.
While data from the National Bureau of Statistics (NBS) has revealed that one of the major sources of Nigeria’s growing inflation emanates from food inflation, attention has however been averted from another major source (core-inflation) which has been consistently rising since May of 2020 as a result of the pandemic and subsequently, has direct affiliation with the trending global supply-chain disruptions raveling various economies around the World. Data from NBS show that core inflation increased from 10.12% in May of 2020 to 13.87% in December of 2021 and this was largely due to supply-chain disruptions.
Emeka Ucheaga, the CEO of EUA Intelligence and a financial analyst at Credit Direct limited stated that “Unlike any point in the last decade, post-pandemic inflation surge is not principally driven by excessive demand but by limits on supply capacity.”
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With Nigeria’s increased import dependency (post-pandemic) coupled with the current global supply-chain disruption, spike in inflation remains imminent and beyond the immediate control of the country’s monetary and fiscal authorities.
The pandemic caused a sudden, sharp shift in consumer spending away from services towards goods. Omobola Adu, a senior investment officer at Afrinvest in an interview with BusinessDay stated that capacity, people and capital cannot be expected to switch the various sectors in the economy so quickly.
“The obvious resultant impact would be bottlenecks in the ‘goods producing’ sectors as supply struggles to keep the pace,” Adu said.
The constraints on goods supply spark higher prices and this drives inflation higher even though the economy overall is yet to fully recover.
Data from Observatory of Economic Complexity (OEC) revealed that Nigeria’s top 3 major imports include refined petroleum, vehicles and machinery comprising more than 25% of Nigeria’s imports.
Data from OEC also revealed that between 2019 and 2021, after refined petroleum, car importation was seen to be the highest imported commodity which has contributed immensely to increase in core-inflation since May 2020.
In 2019, Nigeria imported $1.57B in Cars, becoming the 56th largest importer of Cars in the world. In the same year, Cars were the 2nd most imported product in Nigeria.
Data culled from OEC revealed that cars imported into Nigeria from the US stood at $727M, India ($204M), United Arab Emirates ($134M), Canada ($107M), and Panama ($92.7M).
Babajide Abiola, a Professor of Finance at Covenant University stated that Nigeria’s weaker local currency makes its imports paid for in stronger US dollars relatively more expensive for Nigerian importers and this cost is in turn transferred to the general public and households.
“Based on the average exchange rate, the Nigerian naira depreciated by -41.5% against the US dollar since 2016 and declined by -16.9% between 2019 and 2021 and Nigerians are painfully paying the price and bearing the burdens attached with it,” she said.
According to the United Nations COMTRADE database on international trade, Nigeria imported US$53 billion worth of goods from around the globe in 2021, up by 47.3% since 2016 and up by 11.8% from 2019. Out of that total, vehicle imports stood at US$5.58 Billion in 2020 despite the pandemic.
Between 2020 and 2021, Nigerian importers spent the most on the following 10 subcategories of vehicles.
Cars: US$2.9 billion (up 7.9% from 2020)
Motorcycles: $1.2 billion (down -14.6%)
Trucks: $292.6 million (up 13.9%)
Chassis fitted with engine: $208.8 million (down -66.4%)
Automobile parts/accessories: $197.6 million (down -5.3%)
Tractors: $135.7 million (up 138.9%)
Public-transport vehicles: $107.7 million (down -33.8%)
Armored vehicles, tanks: $103.4 million (up 624.1%)
Motorcycle parts/accessories: $57.1 million (up 10.1%)
Special purpose vehicles: $52 million (up 1.5%)
Among these import subcategories, Nigerian purchases of armored vehicles including tanks (up 624.1%), tractors (up 138.9%) then trucks (up 13.9%) grew at the fastest pace from 2019 to 2021.
These amounts and the percentage gains within parenthesis clearly show where the strongest demand lies for different types of vehicles-related imports among Nigerian businesses and consumers.
On the other hand, Nigeria Imports of Machinery, nuclear reactors, boilers was US$10.33 Billion during 2020 while imports of Mineral fuels, oils, distillation products stood at US$8.48 Billion within the same review period.
With these yearly increases in prices of these imports, the addition of the current supply chain crisis and the current economic debacle becomes a ‘double edged sword’ for both monetary authorities and Nigeria’s inflationary position.
The current supply constraints change everything from a macro-economic perspective. When inflation is driven by demand, judicious policy can in principle stabilize both inflation and growth. However, this is not possible in a world where inflation is the result of supply constraints. Thus, heightened macro volatility becomes inevitable.
To minimize this volatility, central banks globally would rightly want to live with supply-driven inflation while long-run inflation expectations stay anchored. Recent research by EUA intelligence suggests that they should not try to squeeze inflation caused by shifts in demand at all.
“Central banks should take their foot off the gas this year by removing the extremely accommodating stance of monetary policy and return rates to a more neutral setting,” Ucheaga said.
The resumption of activities, unlike a normal recovery, does not require stimulus to be maintained. However, central banks should also not slam on policy brakes, deliberately to destroy activities.
This is the reason why current monetary policy response to higher inflation has been more muted than in the past. It would probably remain so despite the current excitement about an accelerated pace of economic re-opening and policy normalization.
