As currency pressure weighs on commodity prices

Amid rising cost of doing business and soaring commodity prices, Financial Derivatives Company report says there are reasons for Nigerians to tighten their belts, Festus Akanbi reports

Driven by the rising cost of living, the erosion of income due to a constant loss in the value of the naira and the prevailing atmosphere of general insecurity, it cannot be said that Nigerians are living in the best of circumstances.

However, recent market research has shown that among all these and other issues facing Nigerians (unemployed, working class and businesses), the continued scarcity of the dollar and the resulting pressure on the naira tops the list. list of problems that worsen the standard of living of Nigerians. people.

October had opened with an increase in the cost of living, as residents of major cities like Lagos, Port Harcourt, Abuja and Kano faced escalating prices for household items and food items. Businesses were not spared as volatility in foreign exchange markets continued to make the costs of imported machinery and raw materials prohibitive.

Industry watchers have said manufacturers now face a dilemma as it is virtually difficult for them to pass the higher production costs on to consumers without a serious backlash.

FDC: Naira plunges 15.08%

According to analysts at the Financial Derivatives Company, “Since July of this year, when the forex market went into shock after BDCs were excluded from the official market, the naira has plunged 15.08% in the market. autonomous, lowering the effective rate. exchange of most raw materials and imported machinery. This, along with fears of the unavailability of dollars, led to speculative hoarding of products. For example, from January to date, the price of flour and pasta has increased by 44.83% and 40.0% to N21,000 / bag and N6,300 respectively and may increase further in the coming months.

“The FAO Food Price Index rose 1.2% to 130.0 points in September due to higher wheat and oil prices due to tight supply conditions amid high demand . “

FDC analysts, in their monthly FDC Economic Bulletin-October 11, 2021, pointed out that rising energy costs are also giving manufacturers and business owners a nightmare.

Higher energy costs

“Another main driver of inflation is rising energy costs. The price of diesel, which is a major fuel used by logistics and distribution companies, jumped 84.21% to 350 N / liter from 190 N / liter in January. The price of cooking gas has also skyrocketed due to supply shortages.

A 12.5 kg cooking gas now costs 7,500 N, up 25% from 6,000 N in August, and could rise to 10,000 N before the end of the year. This forces consumers to turn to alternative energy sources such as firewood and charcoal (cross elasticity of demand), ”the report says.

In a veiled prediction of tougher days ahead, the FDC report said things are unlikely to improve given the current rise in prices for natural gas and other petroleum products on the international market, in over the inevitability of the removal of fuel subsidies in Nigeria. .

Elimination of fuel subsidies

“The global price of natural gas hit a seven-year high of $ 6.5 / MMBtu (seven-year high) on October 5. The price of PMS is also expected to rise over the next few months as the federal government considers removing subsidies.

“We expect all inflation sub-indices to move in the same direction as headline inflation in September. Monthly inflation is expected to increase from 0.3% to 1.52% (20.15% annualized), food inflation from 1.3% to 21.6% and core inflation by 0, 8% to 14.2%, ”adds the report.

Regarding products with imported content, the FDC report maintained that a combination of a sustained decline in the value of the naira and an increase in logistics costs would make the supposed gains in the current harvest period absurd.

The report states: “Our market research in September found that raw materials with imported content have jumped an average of 6.11% over the past month and are likely to rise again in the coming months.

“Commodity prices generally fall in the third quarter due to the impact of the harvest. However, our market research in September showed a 13.79% increase in the average price of locally produced raw materials. This is in part due to higher logistics costs and increased insecurity. However, the price of yam (medium size) remained stable at 1000 N while the price of plantain fell 20% to 2000 N.

Rising level of misery may worsen the security situation

As the cost of living continues to rise, FDC analysts have warned that the pervasive frustration of ordinary citizens could snowball into further criminal activity unless urgent measures are put in place to reduce the level. of misery.

“The continued surge in commodity prices will further reduce the purchasing power of consumers and increase the country’s level of misery (50.5%), which could increase crime rates,” the report said.

Another salient point of the report is the pressure on business as production costs skyrocket. According to FDC, rising import and energy costs will lead to increased production and distribution expenses, reducing company margins.

Regarding the effect of the unfolding scenario on the investment climate in the country, analysts said investors were already weary and cautious, further stressing that higher inflation would worsen the negative real rate of return on investment. .

The report, which forecast a higher inflation figure for September, said that a likely reversal of the downward trend in inflation increases the chances of a tightening of monetary policy at the MPC meeting in November.

Osinbajo calls for a realistic exchange rate

The FDC reports came almost at the same time that Vice President Yemi Osinbajo argued for a devaluation of the naira to reflect the current reality of the market.

Speaking at the mid-term retreat of President Muhammadu Buhari’s second term, the vice president said the exchange rate is artificially low, which deters investors from importing foreign currency into the country.

“Regarding the exchange rate, I think we need to change our rates to reflect the market as much as possible. This is, in my opinion, the only way to improve the offer,” said Osinbajo.

“We cannot squeeze new dollars into the system, where the exchange rate is artificially low. And everyone knows by how much our reserves can increase. I am convinced that the current demand management strategy adopted by the CBN needs to be rethought, and this is only my point of view.

“Either way, these are all issues that when the governor of the CBN has time to deal with them, he can deal with them in full.”

The naira changes to the dollar at 411 on the official side of the market, while the same goes for 565 for the US currency on the parallel market.

Uwaleke: the devaluation of the naira will hurt the 2022 budget

The post of vice president was not well received by economic expert Professor Uche Uwaleke, who argued that the first casualty in the event of a devaluation of the naira will be the 2022 Appropriation Bill, adding that the budget 2022, which was based on N 410.15 per dollar died on arrival.

In a statement released during the week, Uwaleke said: “The vice president has good intentions. But this statement is capable of triggering panic buying and speculation in the forex market (official and parallel) and further complicating things for the CBN.

“There is no doubt that the devaluation will force down the volume of imports and temporarily reduce the pressure on the foreign exchange market. But have we thought about the impact this would have on the price at the fuel pump and the multiplier effects?

“What about the impact on inflation and interest rates, especially at a time when the inflation rate remains high? Isn’t a high inflation rate hostile to investments, whether local or foreign?

“The argument that the devaluation of the naira will attract foreign investors remains to be considered as other factors such as insecurity also play a role.

“Certainly, the naira has suffered several devaluations in the recent past. It has neither solved the fundamental problem of helping to diversify the export base nor curbed unbridled imports. Doing it again will not change anything. Rather, it is a recipe for high levels of poverty and unemployment.

“Again, suggesting that the CBN should end its foreign exchange demand management strategy that excludes certain items from access to the official window has serious implications for the exchange rate and the economy. On the contrary, it cancels the import substitution campaign of the current administration.

“The good news is that the CBN has sufficient external reserves to meet the real demands for foreign currency at the Investor and Exporter counter. This is what we were told. The CBN should continue to run it while partnering with tax authorities to create multiple sources of foreign exchange beyond oil.

It is hoped that the current cocktail of efforts by the fiscal and monetary authorities to save the economy will begin to bear fruit in the face of the growing frustration of the Nigerian people.

About Chris McCarter

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