How Much Does 5 Naira Really Cost?
Understanding why Mallam Aliyu Mai-Bornu and Dr Clement Isong are becoming more important than the paper they are on
If You Didn't Buy Sibije You're Not My Mate
Ogbeni, look face o. If you didn't buy one small N5 chocolate in Primary school called “Sibije", then you're not my mate. Periodt!
In fact, if you're a proper 90s kid, you should know “Sibije". And it was not only “Sibije" — there was a lot of snack varieties that could be bought for even lower than N5 in the early to mid 90s.
So what happened to N5? Well, it went down the grave with Solomon Grandy. Nowadays, even satchet water (or “Pure water”) is N10. And that's just looking at things from a base scenario. Remove N1000 from a N1 million credit alert and watch everything crumble like Frank Underwood's House of Cards.
Essentially, the prices of goods have persistently increased — Greek speak for inflation. And it turns out things weren't actually better in the mid 90s, they've just gotten worse. In fact, since 1986 when Ibrahim Babangida's military Government introduced the Second-Tier Foreign Exchange Market (SFEM) as part of a broad package of IMF reforms, the Naira has been on a free fall, and the price of goods have increased accordingly.
“Sibije”
Consider that the exchange rate was around 90 Kobo to $1 in the 70s and early 80s, only to trade at N17 to $1 by 1993. As at the end of Abacha's junta in 1998, Naira 'officially' traded at N22 to $1 while trading four times higher at N88 to $1 at the “black” market/parallel market/bureaux de change. Today, you can buy $1 from anything not less than N360.
But it's not only ‘exchange rate pass-through’ effects that leads to inflation. Everything, from currency devaluation to increased aggregate demand to higher production costs can all make goods and services more expensive over a consistent period of time — and render “Sibije" ‘unlickable’.
Let's look through why the Naira keeps losing its purchasing power then, shall we? But first, a look at current inflation figures.
Inflation Figures
As at June 2020, Inflation in Nigeria stood at 12.56%, 0.16% higher than the 12.4% inflation rate recorded in May 2020.
Food inflation was 15.18% while Core Inflation (Inflation excluding the prices of food and energy) stood at 10.13%.
The rise in food index was caused by increases in the price of Bread, Cereals, Potatoes, Yam, Fruits, Fats, Vegetables, Meat, Fish, etc. Core inflation, meanwhile increased because of a steady increase in the cost of Medical services, Hospital services, Passenger transport by road, Pharmaceutical products, Motor cars, Paramedical services, Maintenance and repair of personal transport equipment, Bicycles, Motor cycles, Vehicles spare parts, Services in respect of personal transport equipments, etc.
Photo: Nairametrics
Core Inflation and Food Inflation
At this point, it is necessary to distinguish between Food Inflation and Core Inflation.
Specifically, Core Inflation is inflation index that does not account for price increase in food and energy. Because food and energy prices can be volatile and can flunctuate wildly because of a short-term phenomenon, core inflation takes into account those economic activities that respond to changes in price.
Essentially, core inflation figures can be thought of as the 'real' inflation rate in an economy, whereas food inflation reflects the impact of occasional or outlier shocks affecting an economy.
Inflationary Theories
Economists are largely divided into different camps when it comes to determining the root causes of inflation in an economy.
According to monetary economists, once full employment is attained in an economy, the only factor that can affect the price of goods is money supply. In other words, if money supply increases two-fold, then prices increase two-fold. Meanwhile, Keynesian economists hold that in an economy facing underemployment, an expansion of money in circulation may, in the short run spur aggregate demand, employment and output. However, in the long run “money supply in excess of potential output can be inflationary”.
Structural economists view inflation as occuring in the long run as a result of the differences in some of the services sector relative to the industrial sector, while Post-Keynesians and Marxists see inflation as a product of costs, including wage demands by unions, commodity prices set by firms, prices of imports set by foreign producers and markup as root causes of inflation.
Leave Theory, Face Practical
Irrespective of whatever you think, inflation is caused by these five major factors, viz:
1) Demand-pull inflation - Aggregate demand growing faster than aggregate supply;
2) Cost-push inflation - Higher production costs;
3) Currency devaluation;
4) Rising wages;
5) Expectations of Inflation.
Indeed, if you look carefully at the preceding economic theories on inflation, you'll find that all of the different theories generally cover one or more of the given causes of inflation. Essentially, most economists have their preferred cause of inflation.
But, what specifically causes inflation in Nigeria?
Inflation in Nigeria
Note that the theories on root causes of inflation were premised on economies operating at full-employment, or not. But with Nigeria operating on northwards of 23% unemployment rate, it is clear that increased aggregate demand cannot be the cause of inflation — where is the purchasing power?
Rather, a keener sense of the cause inflation in Nigeria today will take into account higher production costs in the Agriculture sector, especially with regards to food inflation. When the recent currency devaluation by the CBN is also factored, the increase in core inflation makes sense.
Don't forget that the planting season has been disrupted by the Covid-19 pandemic. And importation is more expensive now that supply chains in China and Europe were shut, coupled with the CBN's recent devaluation of the Naira.
But that's not all. Increasing budget deficit also means that the FG is borrowing more locally, a repayment plan which can increase money supply in the economy, essentially spiking inflation — if it hasn't already.
How Does Nigeria Fight Inflation?
Inflation is largely fought using monetary tools, at least in developed economies. We have shown that economists consider excessive money supply relative to total output as a major cause of Inflation. So, in fighting inflation, Central Banks usually increase interest rates so as to increase the cost of access to capital, reducing money supply and thus, reducing inflation. Of course, fiscal tools can also be used to fight inflation.
But Nigeria does not necessarily hear word, and what works in Japan might not work in Jalingo. Because our economy is largely import dependent, exchange rate pass-through have proven to be the major cause of inflation in Nigeria, especially with regards to core inflation. And with the Naira now devalued, the prices of imported goods can only go higher.
In food inflation, high production costs are the cause. Think about all the challenges (and there are many) involved in moving farm produce from Benue to Lagos, the prices of which are borne by the consumer.
Meanwhile, the FG's bloated balance sheet means that a lot of money is still being pumped into the economy which is not commensurate with aggregate supply.
So yes, I wish I had an answer to growing inflation in Nigeria, which is estimated to peak at 15% in 2020. But essentially, if Nigeria dosen't reduce dependence on foreign goods, reduce production costs and reduce budget deficit, we most certainly can't fight inflation.
Maybe the next generation will buy “Sibije” for 50k. Cruise.