August 17, 2020/ 07:00PM/ Adesola Borokinni. Proshare Research /Image
Nigeria's inflation rate went up as data released by the Nigerian Bureau of Statistics (NBS) showed that the domestic inflation rate rose to 12.82% in July 2020 from 12.56% in June 2020, the highest rate recorded in the year. The global spread of the coronavirus harmed the domestic economy (see Chart 1).
Chart 1: Nigeria's Inflation Rate (%)
Source: NBS, Proshare Research
The Angry Twins of Inflation and Unemployment
The continuous rise in the inflation rate (12.82%) coupled with a high domestic unemployment rate of 27.1% recorded in Q2 2020 indicates a rise in the misery of the average Nigerian. The "misery index" is an economic indicator that determines how the average citizen is doing economically and it is calculated by adding the seasonally adjusted unemployment rate to the annual inflation rate. Nigeria's higher rate of unemployment and the worsening level of inflation creates both economic and social cost for the country.
The average Nigerian who bears the main burden of the rise in inflation has witnessed a fall in real purchasing power for the 13th consecutive month, as there has been an increase in essential commodities such as the prices of bread and cereals, potatoes, yam, and other tubers, meat, fruits, oils and fats, and fish. To further worsen the consumers standard of living there was also increases in essential services required for increased productivity e.g. there was a rise in medical services, passenger transport by air, pharmaceutical products, hospital services, passenger transport by road, maintenance and repair of personal transport equipment, paramedical services, and vehicle spare parts.
A Bridge Over Supply Gaps
Recently released NBS data on inflation and unemployment shows that Nigeria is in the grip of a condition economist call "stagflation", a situation where a country faces slow output growth and high inflation. Disruptions to global supply chains have spurred fresh advocacy for self-sufficiency and industrialization. A major reason for the steady rise in both core inflation and food inflation is the huge supply gaps in the economy. The Nigerian economy is heavily reliant on imports and has failed over the years to take advantage of its huge market size to develop a robust domestic network of manufacturing businesses that provide vertical production linkages (see Illustration 1).
Illustration 1: A Bitter Battle with Stagflation
Despite efforts to improve productivity and enhance self-sufficiency, none of the public policies has been able to improve manufacturing growth in the economy as Nigeria's manufacturing sector remains characterized by high import content, shrinking capacity utilization, high cost of production, low value-added, declining output growth, low employment generation and inadequate linkage with other economic sectors.
Nigeria could take a cue from the Asian Tigers who industrialized their economies through grunt work and the force of fiscal discipline and budgetary design. Analysts note that every crisis creates threats and opportunities. COVID-19 may provide Nigeria with an opportunity to evaluate economic policies and strategically position the country to take advantage of them. The country's focus may strategically position it to be the industrialization Mecca of Africa; the next factory of the continent. Its focus on manufacturing will help bridge the supply gap, encourage both backward and forward integration, reduce reliance on imports, increase net FX, increase productivity, boost GDP growth, and generate more employment in the economy.
Welcoming The Tough Times
There are tough times ahead as Nigeria's inflation rate may likely continue to rise if the coronavirus does not abate. A constant spread locally could further heighten the pressure on inadequate medical services and pharmaceutical products making it more expensive and difficult to access. Furthermore, a continuous rise in the number of cases might force the government to impose another lockdown which might limit agricultural production and worsen the food inflation rate. Nigeria's rising inflation may equally taper down, given the slowdown in the global spread of the virus, and if social distancing measures are strictly followed and the virus curve flattens.
Policymakers are expected to face a quandary that may require unconventional policies to rejig the economy. Fiscal and monetary state agents may need to pay more attention to policies that would boost production and productivity to help insulate the domestic economy from external shocks and ease the burden on citizens in the advent of a future crisis.