Although the Naira has recently appreciated against major foreign currencies, it seems that prices of goods and services in Nigeria are unlikely to decrease soon. Despite the positive trends in the exchange rate, the market prices and cost of living continue to rise, contradicting the expectations that come with a currency value improvement.
The US dollar recently traded for N1,060 on a Thursday, which is a significant improvement from its peak of N1,900 in February this year. However, despite this appreciation, consumers have not seen any reduction in prices, as reported by the National Bureau of Statistics (NBS). In the month of March, the headline inflation rate rose to 33.2%, up from 31.7% the previous month. Additionally, food inflation increased to an alarming 40.02% from 37%.
The current situation presents a complex challenge, as most dealers and producers attribute the persistent high prices to the previously high exchange rates. Although the Naira has strengthened, the lag in price adjustments continues to burden consumers. Financial analysts and economists suggest that it may take several months before any significant stability or reduction in prices can be achieved. This delay is partly because prices tend to increase rapidly in response to negative factors but are slow to decrease even when those factors are reversed.
Victor Chiazor, who serves as the Head of Research at FSL Securities, has explained the factors that contribute to the phenomenon of delayed reflection in the prices of goods and services, even after the stability of the exchange rate. He pointed out that historically, prices in Nigeria tend to remain stable or even rise, despite improvements in the exchange rate. This is because prices tend to be “sticky” downwards, meaning they do not decrease as quickly as they increase. Furthermore, high transportation and energy costs continue to drive prices upward, even as the Naira has strengthened in recent times.
The appreciation of the Naira against the dollar needs to be sustained for a longer period of time, and the other cost elements associated with doing business must decrease before consumers can feel the impact. Chiazor has pointed out that “the increase in the prices of consumer goods was initially triggered by the currency devaluation, as well as high energy and transportation costs. However, despite the recent appreciation of the Naira against the dollar, these costs have remained high.”
Ayorinde Akinloye, who is an Economic and Investment Strategist, pointed out that the majority of the consumer goods currently available in the market were either imported or produced when the dollar rate was around N1,500 or higher. As a result, it will take about 60 to 90 days to get rid of the more expensive goods before the ones imported at cheaper exchange rates will start to enter the market.
Gafar Bashiru, a Senior Associate at Parthian Partners, pointed out that although a stronger Naira should, in theory, lead to lower import expenses and subsequently a drop in consumer goods prices, various factors hinder this immediate outcome. These impediments include high transportation costs, security concerns, inefficiencies in distribution networks, and businesses engaging in speculative pricing to safeguard against possible future devaluation.
In addition, the recent strengthening of the Naira and the hopeful outlook for future economic policies highlight the difficulties in achieving stability in prices. It is crucial to undertake structural reforms that focus on promoting local production and lessening the reliance on imports. This can be achieved by improving transportation infrastructure and lowering regulatory impediments, which can improve business efficiency and potentially reduce production costs, leading to lower prices for consumers.
David Adonri, Vice Chairman at Highcap Securities, and Chinazom Izuora, Senior Associate at Parthian Securities, have emphasized that addressing the issue of insecurity and boosting local manufacturing are crucial steps towards curbing Nigeria’s rampant inflation. They suggest that even though the immediate effects of policy changes may not be apparent, a gradual reduction in inflation is expected in the coming months, which could potentially lead to more significant declines by the year’s end.
