As Naira Scarcity Offers Temporary Food Inflation Relief

In a rare scenario, food prices have witnessed sudden drastic fall within the last few weeks as scarcity of the redesigned naira notes persists, but analysts warn this could be short-lived, James Emejo writes

There is a popular saying that whatever goes up must come down. It implies that whatever rises must fall, in obedience to the law of gravity in part. However, this phrase has never come true for prices of goods and commodities in Nigeria.

Whenever there is an increase in the prices of food items and other consumer goods, expecting a fall is often like crying for the moon.

General inflation, which stood at 21.34 per cent in December, remained one of the major macroeconomic challenges bedevilling the economy.

Until the outbreak of war in Ukraine last year, Nigeria’s food inflation accounted for the highest contribution to the headline index as insecurity in food producing communities had prevented farmers from accessing their farms.

Food inflation stood at 23.75 per cent year on year in December, which is 6.38 per cent higher than the 17.37 per cent recorded in the corresponding period of 2021, according to the National Bureau of Statistics (NBS).

High Food Prices Amid Harvest

Despite the government’s assurances in the recent past that food inflation would abate following expectations of good harvests, prices had never crashed.

There had been repeated assurances by some stakeholders and government officials that the impact of the then continued closure of the country’s land borders to curtail dumping and smuggling, which had resulted in increases in the prices of food items, would be ameliorated with the arrival of the harvest season.

The border closure had created a demand-supply gap which needed to be met by local production, effectively shooting up the prices of basic commodities, particularly rice.

Worse still, the on-going war between Russia and Ukraine caused a global supply disruption, resulting in imported inflation in the country and further compounded food prices.

Bumper harvest and prices

But THISDAY findings revealed that some grain farmers, even after bumper harvest, have decided not to sell their produce, hoping that food prices would further appreciate so as to make more money from their investments.

The Rice Farmers Association of Nigeria (RIFAN), had hoped that the bumper harvest expected by farmers across the country would help weigh down on prices of rice in particular, amidst the rising commodity prices.

But stakeholders had insisted that assurances on a possible reduction in food prices may be political as the forces of demand and supply were paramount in determining food prices.

They said other variables namely cost of production, poor infrastructure, and insecurity have always been considered in determining prices.

Chairperson of the Association for Small Scale Agro Producers in Nigeria (ASSAPIN), Bauchi State Chapter, Amina Bala Jubril, had told THISDAY, “You want the prices to crash? But we don’t want the prices to crash because we laboured for it.

“Let me tell you something, even with the bumper harvest, we invested; so, because there’s a bumper harvest, you don’t expect the farmer to throw away his produce, no.

“The farmer should make profit and somehow…The issue is how much did the farmer invest and that’s what is the determinant of price. So, saying the price would crash is maybe saying it to console the citizens because of the high prices of food items.”

According to her, “The government cannot come and make me bring out my produce and start selling it at a cheaper rate,” adding that “the price of local rice is still cheaper than the imported rice”, nevertheless.

A twist of fate

There have been reports of major reductions in food prices across parts of the country in the past few weeks occasioned by the continued scarcity of the new naira banknotes.

The central Bank of Nigeria (CBN) in October 2022 announced the redesign of N200, N500, and N1,000 notes, and asked Nigerians to deposit their old notes before January 31, 2023 when they would cease to be legal tender. The deadline was shifted to February 10 following difficulties obtaining the new notes.

As the scarcity swept across the country and gap between supply and demand widened, and fewer cash chased after supply, food prices were reportedly slashed especially in rural areas.

A trader confided in THISDAY that a basin of cassava flour which hitherto sold for N4,500 was slashed to about N2,500. The price reduction also cuts across other food value chains.

If anything, observers argued that the cashless policy and currency redesign programme of the central bank have been effective to some extent in reining in food inflation.

Analysts cautious

However, analysts in separate interviews with THISDAY on the development, cautioned that the fall in food prices may only be transient, pointing out that the factors that led to high inflation were still much in place.

The analysts were of the opinion that prices would revert to their upward trajectory as soon as availability of the new banknotes improved.

They said while price reduction may be reasonable for perishable items, the same may not be true of imperishable goods.

In his opinion, Professor of Finance and Capital Markets, Nasarawa State University, Keffi, Prof. Uche Uwaleke, said, “I don’t think it’s the best way to tackle inflation that is primarily supply-side induced” adding that “Rather, effort should be geared towards increasing food output and dealing with insecurity and fuel crisis. These should be more in the fiscal than monetary domain.”

Uwaleke said, “Acute shortage of cash especially in rural communities could lead to lower productivity, rising inventory and low-capacity utilisation on the part of firms. For traders dealing in perishable items, the losses would be huge in the absence of storage facilities.

“So, the economic consequences are grave. The way forward is to increase supply of new naira notes and significantly increase cash withdrawal limits with a plan to gradually implement cashless policy while improving payment infrastructure.”

On his part, Wealth Management and Business Development Consultant, Mr. Ibrahim Shelleng, said the drop in food prices must be put in the context of the current naira shortages.

He said, “Due to the lack of cash, sellers face a challenge in selling goods and will therefore have to lower prices to sell to those that have cash.

“This is especially so with perishable goods. However, this does not reflect the reality of the economic situation but merely a short-term reaction to supply demand dynamics. Limited cash supply and high chasing what seems to lack excess supply.”

He said, “The reality is that the high food production costs still exist and if the Naira shortages continue and adoption of e-channels remain slow, it may exacerbate the production problem and lead to food shortages. This will further hike up food prices.

“Nigeria’s inflation figures tend to be cost-push rather than demand pull. Therefore, the current drop in prices will unlikely be sustained and will more than likely skyrocket in the near future.”

Managing Director/Chief Executive, Dignity Finance and Investment Limited, Dr. Chijioke Ekechukwu, said the reduction in food price was only induced by hardship and desperation as a result of scarcity of cash, adding that this is only transitory.

He said, “It is not only food prices that have dropped. Even the cash to cash exchange rate dropped to about N500, except if there is a transfer of naira to the bank.

“Once the Naira supply stabilizes, prices of food items will get back to their previous high prices. This is because the factors that led to their high prices are still persisting and existing. 

“I do not expect the month-on-month inflation to drop significantly, if at all it does drop.”

Also, Managing Director/Chief Executive, SD&D Capital Management Limited, Mr. Idakolo Gbolade, however pointed out that the reduction in food prices in rural areas is temporary due to scarcity of cash.

He said the low food prices can also be attributed to perishable food items which have to be sold in order for the traders not to record total losses.

Gbolade said, “This temporary reduction might however not affect food inflation figures significantly because after the scarcity the prices will most likely go back to the previous level.”