Recession, inflation rate and commodity prices

SULAIMON OLANREWAJU looks at the prices of commodities vis-à-vis a contracting economy and a galloping inflation rate.

This is not the best of times for Nigerians as the effect of the recession keeps escalating, thus pushing many further down the poverty line. The National Bureau of Statistics (NBS) announced last Wednesday that the nation’s economy had slid into recession following two quarters of negative growth.

The recession did not come as a surprise to many people because quite a number of experts had foretold its imminence given the less than satisfactory performance of the economy. The government had even said early in August that the economy was technically in recession. Therefore, the announcement by the NBS only made official what Nigerians had come to accept as a reality.

However, this recession is not the common type because usually recession is characterized by reduced prices as a result of low level of economic activities. Recession is a time of low productivity precipitated by the contraction of the economy. To boost sales, companies reduce their prices, embark on promotional sales and deploy all sorts of strategies to woo customers. But the current recession is nothing like that; it is rather compounded by galloping inflation. Hence, what is happening in the country is not a mere recession but what economists call stagflation. Going by the NBS data released in July, the current inflation rate is 17.1 per cent, the highest in recent times. Consequently, the negative effects of the recession have been far-reaching as the prices of many commodities have hit the rooftop.

Three major culprits are responsible for the rising cost of commodities; they are the exchange rate volatility, the exclusion of importers of some items from access to the forex market as well as the increase in the pump price of petroleum products.

Being an import-dependent country, prices of commodities rise and fall with variations in the exchange rate of the dollar. Following the victory of President Muhammadu Buhari at the presidential election of 2015, the expectation of the business community was that the government would liberalise the foreign exchange market so as to allow the true value of the local currency to be determined by market forces. This, they said became critical given the reduction of the country’s reserves following the crash in the price of crude oil in the global market. They believed that if this was done naira would find its value and investments would pour into the country. But the government did not do that, rather, it deployed the nation’s foreign reserves to defend the embattled currency. This put a gulf between the real value of the currency and its official value, thus forcing many foreign investors out of the country. It also pushed JP Morgan Chase, whose bond index is tracked by over $200billion funds, to delist Nigeria from its Emerging Market Bond Index.

Starting from January this year, the exit of foreign investors took a toll on the fate of the local currency as the value of naira started tumbling in an unprecedented manner. By the time the government had a rethink and decided to tread the path of economic wisdom of allowing market forces to be the determinant of the exchange rate of naira to other currencies, the economy had almost become prostrate. Naira had been so worsted by the dollar and other currencies that there was no immediate remedy for it. So, the bashing continued.

Some of the 41 items whose importers are excluded from accessing forex such as rice and palm oil products are staple foods whose local production is grossly inadequate. With importers having to source expensive dollars to bring them in, their prices naturally went up. Others items which are used in the local production of other products have to be sourced with expensive dollars and this also means that the prices of those finished products have gone up.

The dollar scarcity, which scaled down manufacturing activities while forcing up prices of many commodities, played a significant role in the contraction of the economy in the first quarter, January to March.

It was while the economy was trying to resolve the crisis of the crash in the value of naira that the government announced the full deregulation of the downstream sector of the petroleum industry. Since the country imports petroleum products from other countries, the deregulation of the sector pushed the price of petrol to N145 per litre from the erstwhile price of N87 per litre. The resultant effect was instant; prices of many commodities went up just as the cost of transportation also skyrocketed.

The combination of these three factors has resulted in the further shrinking of the economy in the second quarter and the seemingly unprecedented rise in prices of commodities. Even the NBS admitted that the increase in the pump price of petrol played a significant role in the spike in prices of commodities.

This explains why a bag of rice which was sold for N10,000 in January this year has gone up to N20,000 by the end of August. It also accounts for the rise in the price of a gallon of vegetable oil, from N6,500 in January to N13,000 at the end of August.

A survey conducted by the Nigerian Tribune showed that while the leap in prices of commodities affected imported items the most, other commodities, including farm produce, have not been spared. This is because in Nigeria, prices of commodities are interrelated.

In his comment about the rising prices of commodities, President of the Manufacturers Association of Nigeria (MAN), Mr Frank Jacobs, said “An inflation rate of 17.1 per cent, as reported by the National Bureau of Statistics, is severely harmful to the economy. It is significantly responsible for the rolling contraction in Nigeria’s output since the first quarter of 2016 when the economy grew by -0.36 per cent and in the second quarter by -2.06 per cent. “Over the period mentioned above, the cost of raw materials and manufacturing inputs had risen while capacity utilisation declined.”

The MAN President added “the 41 items of raw materials that were excluded from the foreign exchange market by the CBN should be reviewed, especially, now that the country operates a flexible foreign exchange regime.’’