Anticipate inflation scorches
The year of the metal rat (i.e. 2020) is clearly not the year for the Nigerian consumer. A cross-current of declining incomes and rising prices implies that there is no robust consumer out there. Lending credence to this fact is the pessimistic response of the Q2’20 Consumer Expectations Survey (CES) which was attributed largely to worsening economic condition, deteriorating family financial situation and decline in family income. At 65% of GDP, Nigeria’s economy is consumer-driven. As such, depressed consumption spending spells doom for the economy as the country’s animal spirits could be pushed into a deep slumber despite the gradual easing of lockdown measures.
Policy makers have taken the ultra-expansionary route to respond vigorously to the plunge in consumer confidence, leaving no stone unturned. Extension of moratoriums on CBN intervention loans, facilitating credit to target sectors, interest rate reduction, giving out monetary palliatives, among other initiatives, have been introduced to encourage consumerism at a time when consumers would rather be frugal. People are looking for ways to save money because they have less of it to spend, but policy makers are not having that. The war against savings will clearly stoke existing demand-side inflationary pressures.
Inflation continues to drift further away from the CBN’s prescribed target of 6%-9%. The pandemic has left all calculations on the inflation front in tatters as transport restrictions have led to higher food and core prices. These localized logistics disruptions are likely to persist in the near-term, in the absence of a credible medical solution to the pandemic, contributing to the anticipated build-up in inflation expectations. The situation is expected to be worsened by FX and energy (i.e. power and petroleum sectors) reforms and other unorthodox policies aimed at conserving foreign currency in the economy.
Agriculture output, which usually is a softener on food inflation during harvest season, is also likely to be constrained by farmers’ limited access to viable inputs during the planting season, as well as farmland floods. There are indications that an estimated 25% of Nigeria’s rice harvest has been washed away by floods. Being a major staple in Nigeria, a widening of the rice demand-supply gap will be significant on pricing especially as the land borders are likely to remain sealed. In addition, the recent directive by the Presidency to disallow official access to FX for food imports would result in cost-push food inflation, exacerbating the existing demand-pull food inflation and keeping the headline inflation elevated.
Also, with about 65% of Nigeria’s economic activities attributable to the informal sector, the economy could hit a brick wall if the micro, small and medium enterprises (MSME) sector fails. The operations of MSMEs, that were already labelled risky pre-pandemic, could be stifled by the lack of adequate funding as banks are still extremely risk averse. A lack of funding to MSMEs would intensify existing supply-side disruptions and would stoke inflation eventually.
With clouds of both supply-side and demand-side inflation triggers forming over the Nigerian economy, it makes economic sense to spend now. Deferring spending could be more expensive, especially as the return on savings and investments have become considerably low. However, consuming now with little consideration for tomorrow’s consumption (i.e. saving and/or investing) could lead to more borrowing in the future. In the end, there must be some sort of trade-off between the short-run and the long-run economic objectives. Therefore, the build-up of inflationary pressures will have serious repercussions for the consumption-driven Nigerian economy, as it threatens to further derail the economy.
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