Nigeria's Inflation Rate Rises as Risk Factors Heightens


Wednesday, February 17, 2021, 07:30 PM / by Proshare Research/Header Image Credit: NBS


Nigeria's economy is spinning on an inflation flywheel as headline consumer price index (CPI) for January 2020 moved a dial from +15.75% in December 2020 to +16.47% in January 2021. The recent rise in domestic prices pivots from a twelve month average rise of +13.62%. As inflation blazes ahead like a bat from hell, domestic investors are pulling out their calculators as they estimate the impact of rising prices on real investment yields.


Analysts note that all major inflation components sprang upwards in January 2021; food inflation rose by +20.57% and core inflation by +11.85%. Recent inflation numbers show that the pace of increase in all inflation sub-indexes fell in January 2021 except for headline inflation which rose. The rise in the food index was caused primarily by increases in the prices of bread and cereals, potatoes, yam & other tubers, meat, fruits, vegetable, fish, and oils & fats.


Also, for core inflation, the highest increases were recorded in the cost of Passenger air transport, medical services, hospital services, passenger road transport, pharmaceutical products, paramedical services, vehicle spare parts, motor cars, miscellaneous services relating to housing, maintenance, and repair of personal transport equipment (see Chart 1 below).


Chart 1: Nigeria's Headline Inflation Rate (%) (Jan. 2020-Jan. 2021)

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Source: NBS, Proshare Research 

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Signpost to The End of An Era, Declining Food Inflation?

Will food inflation fall any time soon? Not likely. The composite food index rose by 20.57% in January 2021 compared to 19.56% in December 2020. (see Chart 2 below).


Chart 2: Nigeria's Food Inflation Rate (%) (Jan. 2020-Jan. 2021)

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Source: NBS, Proshare Research


Some analysts forecast that their will be a respite in the rise of food inflation in Q2 2021 given the opening of borders, the AfCFTA agreement, COVID-19 vaccine optimism, and so on. Noting that there was a decline in the pace of the rise in food inflation to +1.01% in January 2021 down from +1.26% in December 2020.


This is true, but despite the optimism of some anaysts that food inflation may decline between Q2 and Q3 2021 there are countervailing indications, such as the sustained conflicts between farmers and cattle herders which could flick sand into the eyes of incorrigible romantics.  Farmers in the Northern and Southern parts of the country continue to lament the destruction of their crops and the incessant incursions on their farmlands by armed AK 47-wielding pastoralists.


The high level of insecurity in the country's farmbelt implies that farm output could decline significantly during the year, thereby putting further pressure on domestic food prices. Economists have observed that the government will need to adopt more aggressive measures to ensure farmer safety and food security in the year. The persistent rise in insecurity cancels out the government's efforts at reducing food inflation. In the new finance act 2020, the government reduced duties on tractors from 35% to 10%, duties on motor vehicles for the transportation of goods to 10%, and the reduction of levy on motor vehicles for the transportation of persons (cars) from 25% to 5%. These combined efforts at bringing down domestic costs could end up in a "sysphean trap" where efforts never translate into results.


Another problem likely to fan the embers of inflation in 2021 is the difficulty in accessing foreign exchange (FX) as well as operational difficulties at Nigeria's ports. Exporters and manufacturers have continuously bemoaned that the high cost of bringing goods into the country i.e. they note that importing finished goods and manufacturing inputs from China is lesser than the total cost incurred in transporting such goods and inputs from Apapa to Agbara in Lagos. Furthermore, the cost of these delays and the huge cost of accessing FX will continue to stoke inflation. Therefore, the government must help to mitigate these risk factors associated with these challenges.


New developments around the ports reveal that the Lagos State newly constituted Traffic Management Enforcement Team directed companies operating around Apapa to acquire park terminals for their fleets around Ojota, Obanikoro, Oregun, Olowotedo-Ibafo, Amuwo-Odofin, Orile-Iganmu, Okorisan-Lekki/Epe pending the introduction of the electronic truck call-up system. Another touted temporary solution is the connection of the railway lines from the Apapa port to Ibadan. Although this has been commended as a good initiative, analysts note that this will only amount to touching the surface of the problem as it does not fully address the fundamental problems encountered at the ports.


 To fully decongest the Lagos ports, other ports must be developed. Studies have shown that there are many economic benefits of building ports. A recent initiative that has been embarked upon is the Ibom seaport which is underway. Building seaports is capital intensive and would require a partnership between the government and the private sector, the benefits of building more seaports and connecting them through a cargo rail system is crucial to evolving a cost competitive economy. Proper decongestion of Lagos ports places the Nigerian economy in a strategic position to take advantage of the AfCFTA which commenced on January 1st, 2021.


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Devaluation to the Rescue?

International organizations like International Monetary Fund (IMF), World Bank and local economists have argued that Nigeria's currency is overvalued and unification of the exchange rate would help solve some of the FX challenges which has snowballed into rising inflation rates. Although this is a valid argument, some other analysts note that devaluation of the currency would further stoke Nigeria's inflation fires. Nigeria is an import-dependent nation, therefore, devaluation would worsen the average citizen's misery given the increases already recorded in food prices, unemployment, PMS prices, electricity billing, and so on.


Meanwhile, manufacturers have argued that if the CBN chooses not to follow the route of immediate unification of the multiple exchange rate or devaluation of the currency, it could adopt other policies such as the crawling peg approach to currency adjustment, Wholesale Dutch Auctioning System, or better still reverse the policy that mandates exporters to remit their non-oil proceeds to the CBN.


Regardless of the method, the CBN's primary end game should be to reduce the premium and arbitrage opportunities that exist as a result of a multiple exchange rate regime. The need to focus on this objective stems up from the need to attract FDIs and FPIs into the Nigerian economy. Most investors are concerned about foreign exchange stability to prevent loss on their investment.


Recent data from the National Bureau of Statistics (NBS) suggests that the local economy recorded a decline in capital importation in 2020 to $9.68bn from $23.9bn in 2019, hence the need to aggressively ensure that capital importation does not contract further in 2021. A fall in FDI, other things held constant, adds pressure to Nigeria's exchange rate. On the other hand, an increase in the inflow of FDIs lessens the pressure on the currency, shores up Nigeria's FX, and eases inflationary pressure. According to economists, Dr. Ayo Teriba, Nigeria's major problem is not liquidity, as the presence of a large number of poor people suggests, but the major challenge of the economy is "excess naira liquidity" not backed by "foreign currency reserves". He, therefore, argues that it is expedient that the Nigerian economy attracts more FDI. He noted that Nigeria needs to adopt creative ways to become the preferred destination for FDI in Africa.


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Fixing The Industrialization Engine

With Teriba's argument kicking in to give sop to arguments for scaling up domestic productivity, there can be no better solution to rising inflation than rising domestic output per unit of labour and capital. Most mature economies presently experience moderate inflation rates, which explains why they can afford to cut interest rates to historic lows (see Table 1 below).


Table 1: Selected Industrialized Economies Inflation Rate (%)



Inflation Rate


December 2020



December 2020



January 2021


South Korea

January 2021


Source: Trading Economics, Proshare Research


A few economists have recently argued that more attention needs to be paid to building and strengthening soft as well as hard infrastructure, while upscaling domestic security to improve agricultural productivity and improve value chain linkages to support backward integration (see  illustration 1 below).  


Illustration 1: Nigeria's Inflation Rate: The Mixed Realities of Price Hike

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Analysts have noted that to attract FDIs into the country the federal government must adopt frameworks similar to that of India, Singapore and China by having a website that catalogues a shopping list of fundable national and sub-national projects.

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 Proshare Nigeria Pvt. Ltd.

Proshare Nigeria Pvt. Ltd.

Proshare Nigeria Pvt. Ltd.



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