Nigeria’s inflation rate for May is around 17.71%, an 11-month high, according to data from the National Bureau of Statistics. As alarming as this data is, the experience for most Nigerians could be worse when it comes to the prices of goods and services.
Consumer goods such as groceries, beverages and provisions have more than doubled for many households in the past year. Aside from households, businesses operating in the country have also reported an increase in their operating costs and have had to rely on price increases to offset the impact.
Nairametrics believes worse is yet to come and the signs are showing by the day.
Recently, diesel marketers warned that the price of diesel could rise to 1,500 N/litre, citing rising global oil prices, the impact of the Russo-Ukrainian war and a general lockdown on supplies around the world. Diesel prices rose immediately in May to 800 N/litre from around 650 N/litre. Diesel prices, which used to be N350/litre, have more than doubled in recent weeks.
Earlier this week, the Independent Petroleum Marketers Association of Nigeria (IPMAN) announced that most of its members had closed gas stations because they were working in a “hostile” environment. Gasoline lines were immediately visible in Nigeria’s financial capital, Lagos.
Electricity prices are likely to rise in the form of another tariff review in the coming months. Tariffs on Nigerians have more than doubled in the past two years, even as power supplies remain epileptic.
Another ominous sign that things are going sideways, the exchange rate crossed N600/$1 at the time, leading to primaries with multiple parties including Bola Tinubu, Atiku Abubakar and Peter Obi as their respective party flag bearers. selected as. This was the first time in Nigeria’s history that the exchange rate had crossed N600/$1, widening the gap to around N180/$1 from the official rate.
The Nigerian stock market, which is often a troublemaker for the economy, has seen handwriting on the wall. Shares are currently down 5.3%m/m and are on track to end the month in losses. More than N2 trillion has been pumped into Treasury bills from interest rates despite negative real yields, suggesting investors are fleeing to the safety of government-backed securities.
While these signs are clearly visible at the local level, events in the world economy also point to a possible global economic contraction. Some analysts are already predicting a global recession that could trigger a major financial crisis, particularly in western economies. The impact of rising inflation in the west has already led to record interest rate hikes in the US, EU and UK, sparking a market sell-off that has rocked cryptocurrencies and stocks.
Recently, US President Joe Biden accused the world’s largest shipping companies of increasing the freight cost of shipping 40-foot containers, which equates to more than $8,000 today before the pandemic. The effects of this are already being felt on global inflation and are also raging in the Nigerian economy. The increase in diesel and fuel prices is an example of this.
All of these signs point to a potpourri of catalysts for the massive economic slowdown that could hit Nigeria in the coming weeks and months. If fuel and diesel prices rise as forecast and still remain tight, there could be a major food shortage and the food shortages that ordinary Nigerians need to survive.
This will force companies to raise their prices even more as Nigerians run out of purchasing power. The exchange rate could fall to N700/$1 much sooner than expected, and yet it is rare to find. As companies struggle to cope with dwindling demand, they could be forced to cut losses, leading to mass unemployment.
Its cascading effect on the security situation in the country can be severe.
What should the government do to avoid this doomsday scenario? In 2020, when we faced a similar crisis triggered by the COVID-19 pandemic, the Nigerian Central Bank raised billions of naira in intervention funds, essentially supporting the public and private sectors. The IMF helped Nigeria stem a slide through loans structured with the necessary dollar supply.
This option is unlikely to be exercised as Apex Bank is currently facing many challenges. Politicians are also busy with election campaigns and are therefore not taking the rapidly deteriorating economic situation into account. Nigeria could be headed for a severe economic crisis, plagued by high costs of goods and services and a declining rate of economic growth, if it doesn’t take immediate action to fix the problems.
Borrowing would be a plausible option to close the revenue gap. A larger supply of Eurobonds could help mitigate the challenges, although it will also come at a cost, especially if we don’t have the revenues to pay for it in the future.
Nigeria could also cap the IMF and World Bank to raise foreign exchange, particularly through new multilateral loans. This will come with significant costs and conditions, one of which could be full deregulation of the downstream sector (removal of subsidies) and allowing naira to float. As we saw with Ghana, this option is great for the markets but not for the silver bullet. It involves significant pain, except that it is he who cures the disease.
Nigeria must act immediately if a potential economic crisis is to be averted. At this point, it doesn’t matter that this intervention is divine.