Thursday, June 01, 2017 10:15 AM/FDC
In the current economic climate, it would be perfectly reasonable for a Nigerian to expect prices to come down.
With less disposable income available, demand is low. Basic economic theory says prices should follow. Where demand declines, so should prices.
Yet in Nigeria this has not been the experience. Nigeria has seen astronomical rises in prices over the last three decades.
In the 1970s, the price of a bottle of coke was 15 kobo, today it is N150. That’s a 99.9% price increase. This has been the trend for many products. In the days when NYSC ‘alawee’ was N200, we could eat a decent meal for about N2.
Today, N200 is barely enough to buy a meal from the side of the road and the N19, 800 ‘alawee’ is considered meager by many.
The primary reason for the dramatic increase in prices over the years: the decline in the value of the naira.
As The Naira Depreciates, Costs Increase
Milton Friedman once said that inflation occurs when the growth in the supply of money outpaces real economic output (i.e. GDP growth). This offers one explanation to why the domestic value of the naira has decreased over time: the growth in money supply has been greater than the growth of Nigeria’s real GDP.
Because prices are valued in currency, when the value of a currency falls over time, the price of the goods increase.
So while the price of a good depends on its own perceived value, it also depends on the market value of money.
The exchange rate provides the best explanation for the declining value of money. Relative to the dollar, the naira has lost 99.7% since its introduction in the 1970s. From N0.65 to $1 in 1973, to N7.4/$ in 1990, to N85/$ in 2000, to N148.21/$ in 2010, and now N305/$ in 2017.
The result of this chronic depreciation on consumer prices can be summed up in a simple example. If a pair of slippers is priced at N2, 000, and the value of the naira falls by 10%, while the market value of the slippers stays constant, the price of the slippers would increase proportionately to N2200.
This is because traders/producers transfer the burden of increased im-port costs to consumers in order to maintain their profit margins. Most times, they do this overtime.
Therefore, as long as the ex-change rate continues to decline, local prices will move in the opposite direction.
Local Production the Only Way to Ameliorate the Depreciating Naira
The exchange rate has such a significant impact on local prices because Nigeria is an import-dependent country.
Most goods sold in Nigeria are either imported as finished products, or produced locally with imported raw materials. Without a stronger domestic economy, prices of our favorite products are likely to increase even more in the future.
To reverse this trend, the economy needs to increase local production (of raw/finished products) and reduce its dependence on imports.