Pots And Pans: Nigeria's Changing Kitchenware

In Nigeria, prices are changing so rapidly that it's hard for people to keep track of how much their grocery shopping costs. On the wealthy peninsula of Victoria Island in Lagos, shopkeepers have stopped using price tags altogether. The soaring prices of basic goods like tomatoes, onions, and rice are causing the poorest Nigerians to skip meals. This is due in part to Nigeria's weak currency, which is heavily dependent on imports, pushing the annual inflation rate to almost 30%. The currency volatility is causing a loss of confidence in the economy, sparking protests, and deterring much-needed investment.

Inflation and the cost of living

In Nigeria, the cost of living is rising at an alarming rate, with inflation reaching almost 30% in 2024, the highest in three decades. This is having a significant impact on the lives of Nigerians, especially the poorest, who are struggling to cope with the rising prices of essential goods and services.

The weak Nigerian currency, the naira, is a key driver of inflation, as the country is heavily dependent on imports. The decline in the value of the naira has led to a decrease in purchasing power, with a single tomato now costing 8 cents, up from 2 cents the previous year. This has also made staple foods such as jollof rice more expensive, due to the soaring prices of onions and rice, which has resulted in some Nigerians being forced to skip meals.

The impact of inflation on food prices is particularly evident in urban areas, where the inflation rate is higher than in rural communities. The price of a kilogram of tomatoes, for example, increased by over 55% between 2021 and 2022, while the price of a bottle of groundnut oil rose by around 46%. Other food items that have seen significant price increases include eggs, cow milk, vegetable oil, beans, potatoes, onions, white garri, tomatoes, and bread.

The high inflation rate is also affecting other areas such as non-alcoholic beverages, clothing, footwear, and housing utilities like water, electricity, gas, and fuel. The price of diesel, for instance, reached an average of 654.46 Naira per liter in April 2022, while the average price of gasoline was 172.61 Naira per liter.

The government has implemented measures to address the issue, with President Bola Tinubu asserting that Nigeria can feed itself and refusing to import food. However, the volatile currency continues to erode confidence, sparking protests and deterring much-needed investment.

Currency volatility

As of June 2024, 1 USD is worth approximately 1500-1515 NGN. This exchange rate has been volatile in recent times, with the NGN experiencing weakness.

The volatility of the NGN has been a concern for Nigerian firms, particularly those in manufacturing. The Manufacturers Association of Nigeria has stated that limited dollar liquidity and high exchange rate costs have weakened industrial production since currency reforms were announced in June 2023.

The central bank has been urged to set a trading band for the NGN to help stem its weakness and reduce the impact on manufacturing costs.

Global Currency Volatility

The NGN's volatility is not an isolated incident. Global currencies have experienced extreme volatility lately, with the US Dollar, Euro, and other major currencies fluctuating significantly.

Impact of Volatility

The impact of currency volatility can be significant, particularly for businesses and individuals conducting international trade or transfers. Volatility can lead to higher costs for businesses, especially if they are importing goods or services, as well as uncertainty in financial planning and investment.

For individuals, currency volatility can affect the purchasing power of their income and savings, especially if they are sending or receiving money internationally.

Managing Currency Volatility

To manage currency volatility, individuals and businesses can use various tools and strategies, such as currency hedging, forward contracts, and diversifying their currency exposure. Working with a financial professional can help navigate the complexities of currency markets and develop risk management strategies.

Impact on businesses

Nigeria's economy is a mixed economy, currently ranked as the 39th-largest economy in the world in terms of nominal GDP and the second-largest in Africa. The country has a diverse range of sectors, including agriculture, services, and industry, with a heavy reliance on oil and gas.

The impact of recent economic reforms and policy changes on businesses in Nigeria has been significant, particularly with the removal of the fuel subsidy in May 2023, which has resulted in soaring costs for fuel, food, and transportation. This has had a ripple effect on businesses and consumers, with fuel prices almost tripling overnight. The end of the fuel subsidy was expected, but the timing and lack of support for vulnerable citizens took many by surprise.

The Nigerian government's decision to end the fuel subsidy has had a profound impact on businesses across the country. The cost of commuting to work, transporting goods, and purchasing food has increased significantly. Businesses that rely on generators, such as those in the Balogun Market in Lagos, are facing additional expenses due to the high cost of powering generators. Some businesses have had to reduce their operating hours to save money on fuel, while others have been forced to increase their prices, passing the costs on to their customers.

The rise in fuel prices has also impacted the transportation sector, with commuters finding it difficult to afford bus fares. This has led to the practice of "lapping," where passengers share a seat to split the fare. Additionally, some individuals have chosen to sleep in their offices or find lodging nearby to avoid the high costs of commuting.

The removal of the fuel subsidy has also affected the agricultural sector, which is a significant contributor to Nigeria's economy. The cost of fuel for agricultural machinery and transportation of goods has increased, impacting farmers' livelihoods and the availability of food.

The Nigerian government has recognized the need to support vulnerable citizens and has proposed providing 8,000 naira ($10) per month to 12 million low-income households for a six-month period. However, it is not clear when these cash transfers will be dispersed, and businesses and citizens are facing ongoing challenges due to the rising costs.

The impact of economic reforms and the removal of the fuel subsidy on businesses in Nigeria has been far-reaching. Businesses are facing increased costs for fuel, transportation, and food, while also dealing with rising inflation and interest rates. The ability to service debts has become more challenging, and foreign direct investment remains low. The complex and evolving regulatory environment, including bureaucratic and burdensome customs procedures, also adds significant costs and delays for cross-border trade.

Despite these challenges, Nigeria remains an attractive market for companies that can navigate the business environment. The country's large population, growing middle class, and abundance of natural resources present opportunities for investment and economic growth. However, issues such as profit repatriation and the lack of foreign currency reserves continue to hinder investment and business operations.

To summarize, the recent economic reforms and the removal of the fuel subsidy in Nigeria have had a significant impact on businesses across various sectors. The rise in fuel prices has increased operational costs, affected transportation, and disrupted the agricultural sector. While the government has proposed support for vulnerable citizens, the full effects of these economic changes are yet to be seen, and businesses are navigating a challenging and dynamic market environment.

Staple food prices

The prices of staple foods in Nigeria have been increasing due to poor economic conditions, exceptionally high inflation, and limited consumer spending power. This has forced Nigerians to resort to rationing food or seeking cheaper unpackaged staple foods.

In February 2024, the prices of major staple foods such as Garri, Rice, Beans, Beef, and Bread increased by as much as 25% compared to the previous month. The average price of 1kg of loose local rice increased by 19.69% from N1,021.79 in January 2024 to N1,222.97 in February. The average price of 1kg brown beans (sold loose) increased from N976.58 in January 2024 to N1,177.9 in February, a 20.62% increase.

The price of sweet potatoes saw an astounding 182.04% increase from April 2023 to April 2024, while unripe plantain prices soared by 168.29% during the same period. Other staple foods that have experienced significant price increases include Ofada rice, local rice, yam, medium-grained rice, Irish potatoes, ripe plantains, chicken feet, and rice agric sold loose.

The depreciation of the local currency has also contributed to the high inflation and rising food prices. The currency volatility has led to a loss of confidence, protests from unions, and deterred much-needed investment.

Small local grocers, which include kiosks and independent small grocers, have performed well despite the challenging economic conditions. They are the preferred channel for consumers as they are located in or close to residential areas and sell products in small pack sizes.

Imports and the naira's collapse

Nigeria's currency, the naira, has been in a state of flux for some time, with a fall in value that is impacting the cost of living in the country. The naira's collapse is due to a multitude of factors, including a complex foreign exchange rate policy, a decline in foreign investment, and a drop in exports of crude oil.

Nigeria's foreign exchange rate policy has been a source of confusion for businesses and investors, with multiple exchange rates and contradictory statements from officials. In June 2024, President Bola Tinubu removed Nigeria's foreign currency controls to get transactions flowing through the official market and help unify the naira's exchange rates. However, this has only fuelled the currency's weakness and added to inflationary pressures.

The central bank of Nigeria has a backlog of accumulated forex demand on the official market, forcing individuals and businesses to turn to the black market for their dollar needs. This has resulted in a currency black market that values the naira at less than the official rate. The black market has sprung up to meet the pent-up demand for dollars as dollar flows to Nigeria have been declining.

The decline in foreign investment and lower exports of crude oil, which account for more than 90% of the country's foreign exchange earnings, have also contributed to the naira's collapse. Plunging crude oil prices starting in 2014 caused an economic squeeze, and the central bank's decision to implement multiple exchange rates in 2017 failed to improve liquidity or encourage dollar inflows.

The impact of the naira's collapse is being felt across Nigeria, with prices for some vital food staples doubling in a matter of months. Trucks carrying items like rice and pasta are being hijacked along rural highways, and protests have erupted in major cities as desperate citizens seek to access basic goods.

Frequently asked questions