The removal of petrol subsidy is expected to further fuel inflation in Africa’s largest economy. The implication is that the cost of living will rise and more Nigerians will sink below the poverty threshold of $1.20 or less than N1, 000 per day. The drowning naira, as a result of the government’s plan to achieve a convergence between the official and parallel market, according to experts will increase the current hardship of the people, at least in the short to medium term. Without a need for a soothsayer, citizens of the most populous country in Africa must brace up for a very challenging economic climate while hoping that the government will roll out its purported palliatives. BAMIDELE FAMOOFO writes.
Bismarck Rewane, Chief Executive Officer, Financial Derivatives Company Limited, has made it succinctly clear that the immediate outcome of the removal of petrol subsidy on consumers in Africa’s most populous nation will be that inflationary impact will linger.
This would mean that the cost of living will rise and more Nigerians will struggle to put food on their tables while many will go below the global poverty threshold of $1.2 or less than N1, 000 per day.
Inflation which recorded its highest increase since 2005 in May 2023, increasing for five consecutive months, is expected to increase to 25.2 percent in June, from 22.41 percent in May.
Inflation is easing out in most countries in Sub-Saharan Africa as currencies strengthened against the dollar and energy prices softened.
Rewane in a report produced by FDC Limited, noted that all six countries under FDC’s review reported lower inflation rates.
For instance, Ghana’s annual inflation rate fell by 4.9 percent to 41.2 percent in April, representing the fourth consecutive monthly decline.
The drop in Ghana’s inflation was due partly to the relative stability of the Cedi as the Ghanaian $3 billion bailout deal with the International Monetary Fund was finalised. Kenya, South Africa, and Angola also enjoyed relatively stable exchange rates in recent times.
Specifically, Rewane expects the petrol subsidy removal to add three percent to headline inflation, pushing it to 25.2 percent in June before tapering towards the end of the year due to the positive multiplier effects of policy reforms.
“However, ripping the Band-Aid off has immediate and far-reaching implications on the cost of living for consumers as food and transport costs skyrocket,” he noted.
Already, 133 million Nigerians are considered multidimensional poor, incapable of adequately meeting the basic needs of life (food, shelter, education, health). The other aspect is the increase in operating expenses and possible drop in sales for businesses.
The reduction in aggregate demand due to weak consumer purchasing power will impact GDP growth negatively.
The harrowing economic impact of removing fuel subsidies notwithstanding, Rewane described it as a difficult sell which must be done.
Tracing the history of subsidy in the country and how eventually the seemingly good gesture went awry, he said: “The once temporary measure that began in the 1970s to shield Nigerians from higher petrol prices has now cut a big hole in government revenue today. As of 2022, the government spent N4.39 trillion subsidising fuel, higher than the N2.45 trillion spent between 2018 and 2021.”
Worse, the NNPC that is paying these subsidies on behalf of the government has been unable to remit a dime to the federation account for the past 10 months, leading to a decline in FAAC disbursements to state governments.
Statistics from FDC Limited showed that FAAC allocations fell by 33.7 percent to N656 billion in May from N990 billion in January 2023.
Financial experts at Cordros Research do not see inflation easing anytime soon as they expect the upward pressure on food prices to remain in June as the below-average off-season harvest amidst the ongoing planting season continues to widen the food demand and supply gap, more so that the leading stockbroking company expects Salah celebrations to induce high food demand.
Just like Rewane’s FDC Limited, experts at Cordros capital said they expect currency pressures to stoke imported food prices, while high intra-state transport costs arising from PMS subsidy removal is likely to have a pass-through impact on food prices. Sequentially, they expect food prices to rise further by 3.49 percent month on month in June.
According to Cordros, “the month of June presents new factors that will exert pressure on the already pressured core basket. These factors include; (1) PMS subsidy removal and (2) liberalisation of the FX market. Notably, we understand that transport costs have settled higher at an average increase of between 50.0 percent and 100.0 percent since the NNPCL effectively announced fuel subsidy removal, increasing prices by about 175.0 percent on 31 May.
“In addition, on 14 June, the CBN announced the abolishment of the multiple FX windows, collapsing all of its multiple rates into the Investors and Exporters Window (IEW). Consequently, we expect to see the direct impact of the two key reforms in the transport and utilities basket and indirect effects on the other components of the core basket. Aside from these, we highlight that the effects of tax increase in line with the 2023 Finance Act and the newly amended 2023 Fiscal Policy Measures will add further pressure on the core basket. Consequently, we forecast core inflation to rise by 3.61% m/m.”
Overall, given the inflation triggers arising from the effective PMS subsidy removal and floating of the currency, Cordros expects consumer prices to rise steadily over the rest of the year, more so that the month-on-month increases are likely to be higher than the corresponding periods of the prior year.
Accordingly, Cordros estimates headline inflation to average 25.11 percent year on year in 2023 as against 18.77 percent in 2022. Inflation is seen rising to 29.23 percent y/y in 2023 compared with 21.34 percent in 2022.
Boniface Chizea, Business Development Consultant and Economist, said the naira will depreciate to N1, 000 to a dollar in the bid of seeking convergence, thus fuelling inflation and making life much more unpleasant for Nigerians.
“The month of June presents new factors that will exert pressure on the already pressured core basket. These factors include; (1) PMS subsidy removal and (2) liberalisation of the FX market. Notably, we understand that transport costs have settled higher at an average increase of between 50.0 percent and 100.0 percent since the NNPCL effectively announced fuel subsidy removal, increasing prices by about 175.0 percent on 31 May
“
He called on the government to encourage productivity to increase the flow of foreign exchange into the country, which will in return increase the value of the naira.
“Enhancing productivity is the one and only assured pathway and we should be on course to follow now,” he argued.
Many Nigerians who are feeling the pinch of economic reform have complained that politicians have shown no signs of cutting down the cost of governance and share in the pain.
Subsidy removal, naira devaluation, and the implementation of a value-added tax on diesel imports are causing further spikes in the prices of goods and exacerbating a cost-of-living crisis in Africa’s biggest economy.
The situation is likely going to worsen in July as analysts have projected a further acceleration in inflation when the imminent electricity tariff hike takes effect.
“It is getting difficult daily for Nigerians, especially with the recent petrol subsidy removal and naira float and other reforms the Tinubu’s led-government is doing,” Demola Balogun, a mechanic at Ketu, in Lagos, said.
“They are good reforms but they are seriously hurting Nigerians and businesses. My family can’t even afford to eat thrice daily anymore as prices keep soaring,” Balogun added.
The effects of the inflation scourge are more evident in the northern parts of the country where malnutrition and hunger rates are surging daily as millions of children roam the streets in search of food.
“Our cost of living has doubled owing to inflation, and we are left with nothing to feed,” said Ummi Ahmed, a 33-year-old housewife and mother of five in war-torn Mubi in Adamawa State – where people and animals fight to survive.
The worsening cost-of-living crisis is causing a decline in living standards, which is hurting physical and mental health and worsening existing conditions, according to experts.
The renewed pressure is not only felt by households but also businesses, as the recent reforms are already taking their toll and threatening to keep many out of business.
“I process fruits and vegetables and I have three generators and often buy five to 10 litres of petrol daily to power my two deep freezers,” Toyin Oladimeji, chief executive officer of Ola Foods, said.
“I bought a litre of petrol for N190–N210 last month; now I buy a litre for N500–N550 since the subsidy removal. My production cost has doubled owing to this amid declining sales,” Oladimeji said.
“All this is already threatening my business which has been struggling for survival. Right now, it is really difficult for small business operators who rely on petrol to power generators,” she added.
Price increases in Nigeria have hit food products particularly hard, worsening the country’s multidimensional poverty that already affects 63 percent (133 million) of the population.
Last year, the World Bank said Nigeria’s accelerated inflation growth had eroded the N30, 000 minimum wage by 35.5 percent and widened the poverty net with an estimated five million people in 2022.
The report highlighted that the country’s minimum wage, which was $82 in 2019, had dropped to $26 owing to accelerating inflation.
Nigeria’s inflation at 22.41 percent in May has outpaced wage growth, according to data from the National Bureau of Statistics, with several analysts projecting a higher double-digit rate in coming months.
Food prices are up by over 150 percent, and transportation costs have almost doubled respectively year-on-year, according to market checks.
The current economic realities have sparked more calls for the government to ease the nation’s cost-of-living crisis and put the brakes on rising prices by cutting down on the cost of governance.
Experts say that the reforms present the perfect opportunity to curb government excesses like the outrageous allowances given to lawmakers, selling off several planes in the presidential fleet, and pruning down wasteful government expenditures and inflated budgets that are not grounded in reality.
“Investors are focused on their profits and the masses of Nigeria are bearing most of the brunt of the necessary but painful reforms,” Kingsley Moghalu, former deputy governor of the Central Bank of Nigeria, said in a tweet.
“The Nigerian government must move quickly to set up shock absorbers to cushion the people’s pain,” Moghalu added.
Chinyere Almona, Director General of Lagos State Chamber of Commerce and Industry, said the chamber is concerned that there may be a consistent increase in inflationary pressures in the near term.
“There are also fears that fuel subsidy removal and the floating of the naira exchange rate will come with its inflationary impact.
“As a result, we anticipate businesses will implement a variety of cost reduction strategies, including downsizing and local sourcing of input factors as they bid to lower operating expenses,” she said.
According to Almona, household real income will also continue to experience a decline, especially in the near term.
She said: “We recommend a pause in interest rate hikes to relieve the pressures on economic agents. We also urge the government to implement fiscal measures such as reducing/ removing the tax on basic food items to protect the most vulnerable as well as spur demand-side growth.
“We also implore the government to hasten the provision of the anticipated palliatives to lessen the impact of the rising trend in prices on economic agents.”
In a June 15 note, analysts at CSL Research said importers of eligible items at the Investors’ & Exporters’ FX window will now have to source FX at a higher rate and will likely push the associated increased costs to the end consumers increasing the price of goods and services.
They added that since 2012, the Nigerian consumer has come under severe pressure.
The analysts said: “From partial fuel subsidy removals to the free fall in Naira in recent years to the imprints left by the border closure and insecurity in food processing regions, the Nigerian consumer has been left impoverished.
“In response, consumers have been trading down on the value chain, switching to cheaper alternatives as living costs rise in the face of generally low-income levels. With the expected rise in inflation following this current depreciation, we expect a further tightening of the consumer purse leading to low demand.”
A helpless regulator
“We recommend a pause in interest rate hikes to relieve the pressures on economic agents. We also urge the government to implement fiscal measures such as reducing/ removing the tax on basic food items to protect the most vulnerable as well as spur demand-side growth
“
Over the past 12 months, the Central Bank of Nigeria has adopted orthodox and unorthodox measures to cool inflation in Nigeria, but to no avail.
While the monetary policy rate has increased by a total of 700bps to a 20-year-high of 18.5 percent per annum from 11.5 percent per annum in April 2022, inflation has maintained its upward trend to 22.22 percent (April 2023) from 16.45 percent, when the CBN began its tightening cycle.
Aside from the sustained upward trajectory, the rate of increase in the level of inflation has become more rapid than in earlier months this year.
Breakdown of the performance of the consumer price index, showed that major drivers of inflation during the month of May remain money supply growth (up 18.87% y-o-y), supply shortages (planting season effect) and exchange rate pass-through (down 3.3% to N765/$).
Notably, the inflation data in May did not reflect the effect of the 150 percent jump in the price of petrol resulting from the reduction in the PMS subsidy.
The full impact of the petrol price adjustment will be felt in the inflation numbers for June, which initial estimate is put at 25.2 percent.
However, the price of diesel, which is the major fuel used by trucks for logistics declined by 12.70 percent to N660/ltr in June from its peak of N756/ltr in May. This is expected to mildly ease inflation pressures.
Inflation in retrospect
The food inflation rate in May 2023 was 24.82 percent on a year-on-year basis; which was 5.33 percent points higher compared to the rate recorded in May 2022 (19.50%). The rise in the food inflation on a year-on-year basis was caused by increases in prices of Oil and fat, Yam and other tubers, Bread and cereals, Fish, Potatoes, Fruits, Meat, Vegetables, Spirit.
On a month-on-month basis, the food inflation rate in May 2023 was 2.19 percent, this was 0.06 percent higher compared to the rate recorded in April 2023 (2.13%). The average annual rate of food inflation for the twelve-months ending May 2023 over the previous twelve-month average was 23.65 percent, which was 4.97 percent points increase from the average annual rate of change recorded in May 2022 (18.68%).
In May 2023, food inflation on a year-on-year basis was highest in Ondo (30.26%), Kogi (29.83%) and Kwara (29.52%), while Sokoto (18.89%), Taraba (21.30%) and Kano (21.33%) recorded the slowest rise in Food inflation on year-on-year basis.
On a month-on-month basis, however, May 2023 food inflation was highest in Rivers (3.74%), Osun (3.44%) and Kogi (3.38%), while Sokoto (0.45%), Kano (0.61%) and Nasarawa (0.85%) recorded the slowest rise in inflation on month-on-month basis
All items inflation
In May 2023, all items inflation rate on a year-on-year basis was highest in Ondo (25.84%), Kogi (25.70%), Rivers (25.02%), while Taraba (19.55%), Sokoto (19.56%) and Plateau (19.89%) recorded the slowest rise in headline inflation on year-on-year basis.
On a month-on-month basis, however, May 2023 recorded the highest increases in Osun (3.05%), Ebonyi (3.02%), Kogi (2.81%), while Ogun (0.64%), Nasarawa (0.89%) and Imo (0.94%) recorded the slowest rise on month-on-month inflation.
Urban inflation
On a year-on-year basis, in the month of May 2023, the urban inflation rate was 23.74 percent, this was 5.50 percent higher compared to the 18.24 percent recorded in May 2022. On a month-on-month basis, the urban inflation rate was 2.09% in May 2023; this was 0.05 percent points higher compared to April 2023 (2.05%). The corresponding twelve-month average for the urban inflation rate was 21.95 percent in May 2023. This was 4.95 percent points higher compared to the 17.00 percent reported in May 2022.
Rural inflation
The rural inflation rate in May 2023 was 21.19 percent on a year-on-year basis; this was 3.98 percent higher compared to the 17.21 percent recorded in May 2022. On a month-on-month basis, the rural inflation rate in May 2023 was 1.80 percent, up slightly by 0.02 percent compared to April 2023 (1.78%).
The corresponding twelve-month average for the rural inflation rate in May 2023 was 20.50 percent. This was 4.59 percent higher compared to the 15.91 percent recorded in May 2022.