As Currency Pressure Takes Toll on Commodity Prices

October 17, 2021

Amidst the rise in the cost of doing business and the attendant upsurge in commodities prices, a report by the Financial Derivatives Company says there are reasons for Nigerians to tighten their belts, reports Festus Akanbi

Buffeted by the rising cost of living, erosion of earnings through a consistent loss of the value of the naira, and the pervading atmosphere of general insecurity, Nigerians cannot be said to be in the best of times.

However, recent market surveys have shown that of all these and other problems confronting Nigerians (unemployed, the working class, and businesses), the sustained dollar scarcity and the attendant pressure on the naira tops the list of problems worsening the living standards of the Nigerian people.

The month of October had opened with a rising cost of living, as residents of big cities like Lagos, Port Harcourt, Abuja, and Kano, were confronted with escalating prices of household goods and food items. Businesses were not spared as the volatility in the foreign exchange markets continued to make costs of imported machinery and raw materials prohibitive.

Industry watchers said manufacturers are now in a dilemma since it is practically difficult for them to pass down the higher costs of production to the consumers without a serious backlash.

FDC: Naira Plunges by 15.08%

According to analysts from the Financial Derivatives Company, “since July this year, when the forex market went into shock after the BDCs were shut out of the official market, the naira has plunged by 15.08% in the autonomous market, dragging down the effective rate of exchange of most imported raw materials and machinery. This, together with the fears of the non-availability of dollars has led to speculative hoarding of products. For example, from January to date, the price of flour and pasta have increased by 44.83% and 40.0% to N21,000/bag and N6,300 respectively and could increase further in the coming months.

“The FAO food price index was up 1.2% to 130.0 points in September on higher wheat and oil prices due to tight supply conditions amid strong demand.”

Analysts from FDC, in their monthly report-FDC Economic Bulletin-October 11, 2021, pointed out that the rising costs of energy are also giving manufacturers and business owners a nightmare.

Higher Energy Costs

“Another principal driver of inflation is higher energy costs. The price of diesel, which is a major fuel used by logistics and distribution companies jumped by 84.21% to N350/litre from N190/litre in January. The price of cooking gas has also skyrocketed due to supply shortages.

A 12.5kg cooking gas now costs N7,500, up 25% from N6,000 in August, and could increase to N10,000 before the end of the year. This is forcing consumers to switch to alternative energy sources such as firewood and charcoal (cross elasticity of demand),” the report stated.

In a veiled prediction of harsher days ahead, FDC’s report said things are not likely to get better given the current rise in prices of natural gas and other petroleum products at the international market, in addition to the inevitability of the removal of fuel subsidy in Nigeria.

Fuel Subsidy Removal

“The global price of natural gas touched a seven-year high of $6.5/MMBtu (seven-year high) on October 5. The price of PMS is also likely to rise in the coming months as the federal government mulls the removal of fuel subsidy.

“We expect all inflation sub-indices to move in the same direction with the headline inflation in September. Month-on-month inflation is projected to increase by 0.3% to 1.52% (20.15% annualised), food inflation to rise by 1.3% to 21.6% and core inflation by 0.8% to 14.2%,” the report added.

On commodities with import content, the FDC report maintained that a combination of sustained fall in naira values and higher logistics costs will make nonsense of the supposed gains of the current harvest period.

The report said: “Our market survey in September revealed that commodities with import content surged by an average of 6.11% in the last month and are likely to increase again in the coming months.

“Commodity prices typically fall in Q3 due to the impact of the harvest. However, our market survey in September showed a 13.79% increase in the average price of locally produced commodities. This is partly due to higher logistics costs and heightened insecurity. However, the price of yam (medium size) was flat at N1,000 while the price of plantain fell by 20% to N2,000.”

Rise in Misery Level May Worsen Security Situation

As costs of living continue to rise, FDC analysts warned that the pervading frustration of ordinary citizens may snowball into further criminal activities unless urgent measures are put in place to reduce the misery level.

“The continued spike in commodity prices will further reduce consumers’ purchasing power and increase the country’s misery level (50.5%), which could increase crime rates,” the report stated.

Another highlight of the report is the pressure on corporate organisations as costs of production soar. According to FDC, rising import and energy costs will push up production and distribution expenses, squeezing corporate margins.

On the effect of the unfolding scenario on the investment climate in the country, analysts said investors are already weary and cautious, pointing out further that higher inflation will widen the negative real rate of return on investment.

The report, which forecasted a higher inflation figure for September, stated that a likely reversal in the downward inflation trend increases the chances of a tighter monetary policy stance at the MPC meeting in November.

Osinbajo Makes Case for Realistic Exchange Rate

The FDC reports came almost the same time when Vice-president Yemi Osinbajo made case for naira devaluation to reflect the present reality of the market.

Speaking at the midterm retreat of President Muhammadu Buhari’s second tenure, the vice-president said the exchange rate is artificially low, and this is deterring investors from bringing foreign exchange into the country.

“As for the exchange rate, I think we need to move our rates to be as reflective of the market as possible. This, in my respective view, is the only way to improve supply,” Osinbajo said.

“We can’t get new dollars into the system, where the exchange rate is artificially low. And everyone knows by how much our reserves can grow. I’m convinced that the demand management strategy currently being adopted by the CBN needs a rethink, and that is just my view.

“Anyway, all those are issues that when the CBN governor has time to address, he will be able to address in full.”

The naira is changing for a dollar at 411 at the official side of the market, while the same goes for 565 to the US currency at the parallel market.

Uwaleke: Naira Devaluation will Hurt Budget 2022

The Vice-president position did not go down well with economic expert, Prof Uche Uwaleke, who argued that the first casualty in event of Naira devaluation will be the 2022 Appropriation Bill, adding that the 2022 budget, which was predicated on N410.15 per dollar is dead on arrival.

In a statement released during the week, Uwaleke said, “The Vice President means well. But this statement is capable of triggering panic buying and speculation in the forex market (official and parallel) and further complicating things for the CBN.

“No doubt, devaluation will force down the volume of imports and reduce the pressure in the forex market temporarily. But have we thought of the impact it would have on the pump price of fuel and the multiplier effects?

“How about the knock-on about inflation and interest rates especially at a time when inflation rate remains elevated? Is a high inflation rate not inimical to investments whether local or foreign?

“The argument that naira devaluation will incentivise foreign investors remains to be seen as other factors such as insecurity equally play a part.

“To be sure, the naira has suffered several devaluations in the recent past. It has neither solved the fundamental problem of helping to diversify the export base nor curbed unbridled imports. Doing so yet again will not change anything. Rather, it’s a recipe for high poverty and unemployment levels.

“Again, suggesting that the CBN should discontinue its forex demand management strategy to the effect that certain items are excluded from accessing the official window has grave implications for exchange rate and the economy. If anything, it negates the import substitution drive of the present administration.

“The good news is that the CBN has sufficient external reserves to meet genuine demands for forex at the Investors and exporters window. This much we have been told. The CBN should continue to manage it while joining hands with the fiscal authorities to create multiple sources of forex beyond oil.”

It is hoped that the current cocktail of efforts being put in place by the fiscal and monetary authorities to salvage the economy will begin to bear fruits in the face of the growing frustration of the people of Nigeria.

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