Monday, May 17, 2021 / 12:30 PM / by Adesola
Borokinni, Proshare Research/Header Image Credit: NBS
Nigeria's inflation rate declined slightly to 18.12% in April 2021 from 18.17% in March 2021 beating most analysts forecast. Many local economists had projected that Nigeria's inflation rate would continue its 20-month upward rise into April, but instead, the growth of inflation rate came to a halt.
Nigeria's food inflation rose by 22.72% in April 2021 compared to 22.95% in March 2021. The rise in the food index was caused by increases in prices of coffee, tea, cocoa, bread and cereals, soft drinks, milk, cheeses, egg, vegetable, meat, oils and fats, fish & potatoes, yam, and other tubers.
Additionally, core inflation stood at 12.74% in April 2021 representing an increase from 12.67% in March. The National Bureau of Statistics (NBS) data shows that the highest increases were recorded in prices of pharmaceutical products, vehicle spare parts, hairdressing salons & personal grooming establishment, garments, furniture & furnishing, medical services, shoes & other footwears, motor cars, major household appliances whether electric or not, dental services, hospital services, non-durable household goods, and Fuel & lubricants for personal transport equipment.
Despite the temporary relief in the rate of rise in domestic prices, it is forecast that the growth of domestic inflation would pivot upwards in months to come. There are expectations that reoccurring challenges such as insecurity, foreign exchange challenges, and seaport operational difficulties would continually fan the flames of inflation (see Chart 1).
Chart 1: Nigeria's Headline Inflation Rate (%)
Source: NBS, Proshare Research
The Monster Called Insecurity
The Nigerian economy has become prey to high levels of insecurity such as the problem of Boko Haram, banditry, and kidnapping. This has led to increased security warnings by the United States, Canada, Australia, and the United Kingdom. The Global Terrorism Index (GTI) which ranks 163 countries according to the impact of terrorism based on factors such as the number of attacks, fatalities, injuries, and the extent of property damage for 2019, ranked Nigeria third. However, data for 2020 and 2021 has not been released, it is feared by many analysts that Nigeria's insecurity concerns have worsened. Some of the notable insecurity concerns that have trended this year include the following.
Although these are high profile mass kidnappings, there have also been situations of smaller mass kidnappings. Given that the Northern parts of the country represent the food basket of the country, it is expected that if insecurity persists, food inflation and headline inflation would rise in months ahead. Therefore, the combination of insecurity, rising logistic costs, and fertilizer scarcity would lead to a spike in inflation over the next few months of 2021.
Illustration 1: Insecurity: The Root Cause Monster
Taming Food Inflation
Regardless of the best innovation or agricultural strategies to boost agricultural productivity, it is crucial that the challenge of insecurity be addressed. This is necessary to attract foreign investors/investment who would be interested in expanding agricultural productivity in Nigeria. For example, nations like Netherlands and Singapore have proven that with the right attitude, policies, government support, Nigeria can increase its agricultural productivity (see Chart 2).
Chart 2: Nigeria's Food Inflation (%)
Source: NBS, Proshare Research
Lessons from the Other Side: Netherlands and Singapore
The Netherlands as of 2018, was the second-largest food exporter in the world, second only to the USA, which is surprising given the small arable land. Netherlands is the world leader in potato export above France, Spain, and the US. How did Holland achieve this feat despite the small number of arable lands and little aid? The answer is technology. On the farm in the Netherlands, some tractors drive themselves, some drones monitor crops and there is resource optimization at the highest level.
The University of Wageningen in the Netherlands is known as the Mecca of food research. Its motto is to improve food security for the entire world. The Netherlands government has spent a bundle on the University's research work. In two decades, the University's budget doubled. The University got 50% of its funding from the government, 25% from its internally generated revenue, and 25% from private companies. Also, according to the Time Higher Education ranking, the University's studies is the most cited in the field which is Agriculture.
The University is also a pioneer in LED lamps, greenhouses which allows for the creation of precisely controlled artificial microclimates which has made them one of the leaders in tomato growth despite the country's unfriendly climate conditions for the crop. For example, in the United States of America, farmers need about 126 liters of water to grow one kilogram of tomato but in the Netherlands with the aid of technology, it can use only 8litres to produce the same quantity of tomatoes. The application of technology in tomato cultivation has led to a great economic and ecological savings.
Furthermore, the Netherlands has an agricultural council office that explains to farmers the type of machines to buy, and the best technology suited for specific crops. Also, livestock farmers in the Netherlands, do not use antibiotics for their animals rather they use advanced veterinarian techniques in such a way that promotes animal resistant to diseases rather than waiting to cure ailments. The same with plant pesticides, the Netherlands uses drones to monitor crops such as vegetables to prevent them from being infected. In a country where half of the crops are irrigated, they have managed to reduce water consumption by 90%. Also, they have increased their exports of agricultural produce and have been able to export some of their technologies to generate income.
Singapore in Agri-Relief
Another country, actively working on changing its agricultural productivity landscape status is Singapore. Singapore is mainly associated with trade, tourism, technology, financial industry, exports but not Agriculture. Less than one percent of Singaporean territories are occupied by farms. Most of its lands are used for housing, offices, and commercial spaces. Today there are fewer than 600 hectares and the agriculture share of GDP is less than 0.02%. As it grew richer most of its lands were used for houses and other commercial activities.
The government decided to increase agricultural productivity through its 30 by 30 express plan to produce 30% of its food it consumes by 2030. The government invested $200m in various channels. It plans to achieve this by actively supporting a new type of agriculture referred to as Agritech. It is a new form of ultra-intensive farming using the most available space to multiply farm units e.g., in high tech farms, vegetables are grown in a modern greenhouse in which artificial light, humidity, and temperate conditions are optimized for each crop and they are irrigated with nutrient and rich water. Furthermore, harvesting is automated with the use of robots.
Although these are great examples for the Nigerian economy, analysts note that the fundamental issue of insecurity must be tackled firmly, comprehensively, and permanently. The lessons that could be learned from both Singapore and Netherlands include investing significant amounts of money in research, exercising right-sighted political will by the government, partnership between the government and the private sector, and the infusion of technology into agriculture.
A Tough Grind for MPC
Although the Nigerian economy recorded a slow growth of +0.11% in Q4 2020, many analysts have argued that the recovery was K-shaped and saw that certain parts of the economy resumed growth while others lagged. Although there was a slight decline in the headline inflation, the possibility of inflation rising in future months will be a source of concern for next week's CBN MPC meeting. The MPC appears to be faced with the challenge of either increasing the monetary policy rate (MPR) to forestall a rise in domestic prices or maintaining the status quo to ensure growth.
Illustration 2: A K-shape Recovery
It should be noted that almost all economies are beginning to record an increase in inflation rates as economic activities rise a few ticks. But unlike in other more developed economies where the main driver of inflation is rising consumer and producer spending, Nigeria's inflation rate is more the result of cost push factors or higher cost of production, distribution, and sales. The April inflation rate for the US was 4.2%. In Britain, the inflation rate has been predicted to rise. Most advanced economies have emphasized that the rise in inflation rate is temporary and would be caused by rising economic activities and a base rate effect. Even though the inflation rate in some of these economies have passed thresholds set by monetary authorities e.g., America set a threshold of 2% but has surpassed that threshold, their emphasis has been on promoting economic growth. Indeed, most mature economies have held back from the temptation of raising interest rates, at least for now.
It is predicted that given the peculiarities of the Nigerian economy including low productivity and slowing investment, the MPC might be forced to take the bull by the horn or take the bold step of increasing the rates. Although, this decision if taken might not sit well with borrowers and corporates who would see an increase in their borrowing cost and operations, it may be necessary to cool off recent inflationary heat.
The Risk of Imported Inflation
While analysts fear the possibility of higher interest rates in 2021, they equally observe that the Nigerian economy is susceptible to imported inflation as there has been an increase in global commodity prices and manufactured goods in developed economies. According to the NBS 2020 trade data, the Nigerian economy was a net importer of goods, as imports were valued at N19.8trn while exports were worth N12.5trn leading to a trade deficit of N7.3trn.
Nigeria imported manufactured goods worth N3.83trn and agricultural goods worth N532bn in 2020. It is therefore, predicted that in addition to the problems of seaport operations, lapses in the e-call up system and traffic congestion at the Apapa, Lagos wharf, and exchange rate difficulties, domestic supply chain disruptions would hamper inputs and hike production costs.
A few analysts have argued that changing Nigeria's productivity narrative would require significant investment in infrastructure. Given the government's lean purse, some economists advocate for an increase in the marginal rates of taxes to fund some of these capital projects while others have argued that raising tariffs at this time would only increase the levels of inequality in Nigeria instead the government should focus on blocking leakages which could be re-invested in priority sectors that could raise productivity (see Illustration 2).
Illustration 2: The Social Wealth Distribution Curve
According to several economic thought leaders, the government/policymakers must prepare Nigerians for the challenges ahead. They also observe that it is important that Nigerians brace up for a squeeze in their standards of living as wallets get flattened, purses get squashed, and jobs get trampled. The going might prove tough but the longer-term outcome could be redeeming.