People & Money

How Inflation Makes Poor Nigerians Poorer

“The policy that has driven inflation and poverty most forcefully has been Nigeria’s foreign exchange policy management. The World Bank in its Nigeria Development Update (NDU) revealed that surging inflation and rising prices pushed an estimated 7 million Nigerians below the poverty line in 2020″.

Yewande Olajide is a food seller, popularly known for her signature Ofada rice and sauce in Oshodi market. She sells food by the roadside. Before the new coronavirus pandemic, the mother of four netted a monthly profit of N15, 000 – N20, 000.

However, this year, things have become tougher. Though Olajide has increased the price of her Ofada rice, her profit margin has dropped. Every naira of her reduced profit also buys much less compared to what she could afford to buy last year.

“Before the Covid19 pandemic, a derica (a local measurement for selling foodstuff) of rice used to be N350. It it is now around N750. The price of most things in the market has doubled and it continues to increase every day” she said.

For the past six years, Nigeria has experienced double-digit inflation with the rise in consumer prices reaching the highest point of 16.91% in 2020. A report by the World Bank forecasts an inflation rate of 16.5% for 2021.

Structurally, there are significant linkages between inflation and the exchange rate (and hence the price of crude oil). The all-knowing Nigerian “Facebook economist” pontificates on how the exchange rate is a problem only for elites.

But it is clear that the financial blows on Yewande largely spring from the rising prices of imported components of inputs. These are mainly tomato puree and vegetable oil. Inputs into cultivating or distributing grown-in-Nigeria ofada rice such as cutlasses and pesticides and car spare parts are either imported or have imported components. They have also become more expensive.

Also Read: Nigeria’s inflation problem and the ‘Gbatueyos’ at the CBN

The World Bank in its Nigeria Development Update (NDU) revealed that surging inflation and rising prices pushed an estimated 7 million Nigerians below the poverty line in 2020. Many of this 7 million are people in self-employment like Yewande and their dependents.

1-0-1: Inflation and Immiseration

When prices rise, the quality of life of the poor falls immediately. The poorest Nigerians live “hand-to-mouth” i.e. they buy food and other necessities from their daily incomes. They lack savings to draw on. Even small increases in prices force them to reduce consumption drastically. Many of them forgo lunch (i.e. instituting 1-0-1 feeding pattern ) and/or reduce the quality of what they consume. They reduce or eliminate meat and milk from their diets.

Better-off Nigerians have access to forms of savings or investment. These preserve their purchasing power and thus “compensate” for inflation e.g. shares, plots of land, poultry etc. They also convert their savings to hard currencies like dollars and/or invest in cryptocurrencies. Additionally, formal sector employment or livelihoods to an extent protect the better-off from inflation (through salary reviews or schemes like CBN pandemic relief lending).

Inflation not only reduces the living standards of the poor. Persistent inflation like Nigeria’s creates “poverty traps”. It makes it very difficult for the poor and their children to escape poverty. Poor nutrition affects children’s brain development and their ability to learn.

A report by the United Nations Children Fund (UNICEF) ranked Nigeria as the country with the highest-burden of malnutrition in Africa and the second highest in the world. The global agency disclosed that one out of every three children in the country was stunted. Also, one of every 10 children was wasted from not eating the right food combinations.

“Close to 17 million Nigerian children suffer from malnutrition. They are not eating the food or nutrients they need to thrive and grow well, leading to irreversible developmental harm.

“The findings of the report are clear: millions of young children are not being fed diets adequate for their growth and development,” UNICEF Nigeria Deputy Representative, Rushnan Murtaza, said.

The rise in the number of Nigerians living below the poverty line is accompanied by a rise in criminality. More are Nigerians opting to commit crimes as a means of livelihood. The poor are more likely to resort to petty crime as inflation diminishes already paltry incomes. Inflation thus results in crime, drawing indigent young people, especially males, away from learning or practicing trades. It locks them and their children in a cycle of irregular income, disruptive lifestyles and poverty.

The Policy Triggers

According to the World Bank’s Nigeria Development Update (NDU), inflation in Nigeria and the deep poverty it produces largely are consequences of “stalled reforms”, in other words, defective economic policies.

The policy that has driven inflation and poverty most forcefully has been Nigeria’s foreign exchange policy management. Rather than initiating a timely, orderly and decisive devaluation like other oil-income-dependent economies like Egypt, Azerbaijan and Russia in response to the crash in oil price (from  $107.95 a barrel on June 20, 2014 to $44.08 a barrel in January 28, 2015), Nigeria adopted controls to restrict access to foreign exchange. Nigeria has maintained its multiple exchange rates despite several announced reforms, a system which is widely judged to have encouraged waste and corruption while causing uncertainty and deterring production and investment.  It is generally believed that Nigeria’s 2016 recession was entirely self-inflicted.

Also Read: Inflation is not about to go away all by itself

The measures through which Nigeria has sought to reduce imports, such as prohibiting 40 items from accessing foreign exchange at the Central Bank of Nigeria and closing the country’s borders rather than having higher but freely accessible prices for foreign exchange have directly stocked inflation and the rate of poverty.

Many of the prohibited 40 items, for example, maize, are raw materials used in the production of many goods. The prices of these goods go up as their manufacturers source more expensive foreign exchange. There is also a negative impact on unemployment as demand for milk, noodles, etc. falls.

The irony is that the CBN provides foreign exchange to very rich Nigerians for expenses such as paying school fees, medical bills, or mortgages abroad at the lower official exchange rate.  Restricting food imports or barring imports from CBN dollars does not encourage local production.

It allows local producers, often much better-off Nigerians, to enjoy supranormal profits. This is partly because the government does little to address constraints on local production. Rather, “complementary” harmful policy choices such as the preference for subsidies in place of cost-reflective electricity tariffs limit investment in infrastructure.

These bad policy choices have seen a drop in foreign direct investment to Nigeria and foreign investors have also shied away from investing in stocks, thus bringing much-needed dollars to Nigeria, due to difficulties in taking capital and profit out of the country as a result of foreign exchange controls.

Nigeria has rejected a decisive devaluation that would establish a transparent and sustainable price for foreign exchange and thus attract investment. Forex control measures cause uncertainty, scarcity, and rising inflation. Inflation in Egypt declined to 5.2% in October 2021 after the Arab country implemented a bold currency devaluation. It had risen to 23.52% in 2017

There are clear and direct links between Nigeria’s weak economic policies and the country’s poor investment, inflation and poverty figures.  Data published in August by the National Bureau of Statistics reported overall unemployment at 27.1%, with underemployment at 28.6%.

The road to inflation and poverty hell

The Nigerian government advertises policies that create inflation and poverty -import bans, border closures, multiple exchange rates etc.-  as interventions to “save foreign exchange”, “create jobs”, “develop the country’s manufacturing base” etc.

But there is unequivocal evidence from five decades of economic history that these policies are not shortcuts to development. Their only “benefit”  is that they relieve political elites of the duty of selling tough economic policy reforms to citizens. They also enrich a few people while trapping an ever-growing number of Nigerians in poverty.

For a change, Nigeria should adopt policies that can reduce inflation and preserve consumption in 6-12 months.  Rather than policies that would “revolutionise” manufacturing or agriculture in 5 years but relentlessly drive up inflation. Policies that cause short-term poverty cannot drive long-term economic growth.

Related Articles

Back to top button

Subscribe to our newsletter!


Stay up to date with our latest news and articles.
We promise not to spam you!

You have successfully subscribed to our newsletter

There was an error while trying to send your request. Please try again.

Arbiterz will use the information you provide on this form to be in touch with you and to provide updates and marketing.