Nigeria As An Import Dependent Economy - Outlook for Commodities and Impact on Ordinary People


Monday, January 09, 2017/ 3:48 PM /FDC

Nigeria is a commodity dependent economy and when there is a boom, the economy thrives, in a burst they suffer. According to the economic complexity index, Nigeria is the 52nd largest importer in the World and commodities like wheat, corn, rice, raw sugarcane, dairy products consume over $22bn of foreign exchange annually. In a critical time like this, the export commodities that are relevant to us are crude oil and cocoa.

Energy prices nearly bottomed out in the first half of 2016, driven by record production from OPEC, non-OPEC and U.S shale producers. The Chinese economy (the 2nd largest consumer of oil in the world) went through a rough path, thus denting oil demand amid supply glut.

However, the outlook for oil appears brighter as OPEC and non-OPEC producers agree to stabilize the oil market by cutting output by 1.8mb for the first time in decades. As a result, industry experts predict oil prices will trade in a positive territory in the near term. However, concerns on the re-entry of U.S shale producers back to the oil fields will likely reverse gains.

Cocoa prices traded above $3,000mt in the global market before retreating to a 3 year low. The downward trend was largely attributed to favourable supply outlook in Ivory Coast and Ghana which accounts for two-thirds of global cocoa production. According to the latest EIU report, the global cocoa markets will remain in a deficit, but the production shortfall will narrow significantly. The supply deficit in 2015/16 will shrink to 128,000 tons from 144,000 tons and in 2017/18 will narrow to 12,000 tons.

Ample global supplies and rising inventories continue to weigh on wheat prices. Favourable weather condition in the U.S. Europe, Black Sea region have prompted bumper harvests. The world stocks ending 2016/17 is expected to rise, up 5% to 237m tons compared to previous year levels. This build up is also largely attributed to surging inventories in China.

Raw sugar prices reached a 4 year high in 2016 as El-Niño weather conditions hindered crop production in major growing countries. The EIU projects that world sugar production will rise by 1% to 168.2m tons in 2016/17 after declining by 3.2% in previous season. The expectation of a rise in sugar production is due to improved production in Brazil, the EU and Russia.

Forex scarcity, naira weakness, unfavorable trade policies such as: higher import tariffs, ban on certain commodities have weighed heavily on domestic commodity prices. We expect prices to remain sticky downwards if the prevailing factors persist.

The latest development on the increased import tariffs on essential commodities like sugar, salt, rice, alcohol, beverages, tobacco and cement will further hike already inflated prices. Traders and manufacturers of these commodities will have to transfer some of these costs to the end users.

Consumer Price Index (CPI) which measures the price change in consumer goods and services including food, energy related cost, clothing has maintained an upward trend, reaching the highest level in 11 years. Despite muted money supply, consumer resistance and declining disposal income, inflationary pressures still persists. This is can be mainly attributed to forex scarcity and currency depreciation

A high inflation environment hurts consumers’ purchasing power, because rising prices means consumers will have to spend more the same goods and services. Mounting petrol and utility costs, job losses and low wage growth have left consumers unwilling to spend unless they really need to.

Real wage inflation has yet to set in to compensate rising prices and as such consumers continue to adjust their spending habits in accordance to this reality. There has been no adjustment to income, and this has resulted in increased consumer resistance.

Consumers are most sensitive to any price increase, shifting to alternative lower cost products – consumers search for products with good affordable quality. They tend to delay or reduce the purchase of personal and household durable goods such as (clothing, electronics and cars), leisure, entertainment and indulgence or luxury goods e.g. premium products. Consumers also tend to purchase in fewer quantities or adjust to larger size items to avoid frequent trips to the store.

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