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Home Economy

Despite Naira Rebound, Prices Of Commodities Remain High

Over the past few weeks, the naira has appreciated from a record low of around ₦1,900/dollar to ₦1,189/dollar as of Monday, April 15. In spite of this, Nigeria's inflation has risen to 33.2%.

Adeluola Abiola by Adeluola Abiola
April 15, 2024
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Despite Naira Rebound, Prices Of Commodities Remain High
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Many Nigerians have been greatly relieved by the emergence of naira appreciation as they have been enduring the detrimental consequences of the continuous and unstoppable devaluation of the naira against the dollar. The impact of the weakened local currency has been particularly felt in the rising costs of goods and services.

Every time one went to the market, it appeared that the prices of essential goods such as staple foods and household items were constantly increasing. This trend was also evident in the rising costs of transportation, utility bills, and various other services.

The concurrent escalation in the costs of commodities and services coupled with the devaluation of the naira is predominantly due to the nation’s heavy dependence on imported goods. A substantial proportion of all the items utilized in the country are imported, including numerous consumer and industrial products like milk, sugar, petrol, vehicles, and machinery.

It is not unexpected that prices increase when the expenses of importing goods rise. Service providers, although not selling imported products directly, will need to raise their prices to maintain profitability due to their reliance on imported goods for daily operations. This cycle contributes to inflation.

Why Price Of Goods Are Still On The Rise Despite Naira Appreciation

But, as many may wonder, the prices of goods remain costly despite that the naira has strengthened steadily against the dollar and other major global currencies in the past few weeks. Well, this may be unconnected to different factors, including price stickiness.

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Price rigidity happens when companies do not promptly reduce the prices of their products and services due to the elevated cost of their existing inventory. A significant portion of the items available in the market today were either imported or manufactured during a period when the exchange rate of the naira against the dollar was considerably low.

It is usually when they exhaust their old stock and purchase or manufacture new ones that the prices will adjust, all things being equal. That way, they do not unusually incur losses and cut into their profit margins by selling at a rate lower than the original cost price.

The psychology of the market also plays a significant role in maintaining high prices for goods and services. There is a fear that the recent gain of the naira against the dollar is only temporary, and the currency will depreciate again shortly. Consequently, businesses may be reluctant to lower prices if they anticipate a weakening naira. This cautious approach can prolong the delay in reducing consumer prices.

For businesses in the service industry that do not sell physical products, additional considerations like high operating costs can contribute to price stickiness. Many service providers rely on imported goods and equipment for their daily operations, from office supplies and cleaning materials to tech hardware.

Adjustments were made to wages and salaries during the period of a weaker naira, and these adjustments may not be reversed even when the naira strengthens. The act of reducing salaries is a sensitive and contentious decision that has the potential to negatively impact the motivation of employees. Maintaining high salaries and overhead costs while simultaneously reducing the prices of services offered can put significant pressure on the profit margins of these enterprises.

In summary, the consequences of the naira’s appreciation might require a considerable amount of time to influence consumer prices, owing to the factors mentioned earlier. Enterprises usually consider not only the present exchange rate, but also their previous acquisitions, the overall production expenses, and future uncertainties. Although a stronger naira is a positive development, Nigerians may have to exercise patience until consumers truly experience its complete effects.

What Economists Have To Say About It

Economists have stated that it will take some time for Nigerians to feel the impact of the current strengthening of the naira against the dollar on the prices of commodities in the country.

This was revealed by the Chief Executive Officer of Economic Associates, Ayo Teriba during an interview with Sunday Punch.

He went on to explain that the impact of the naira on prices exhibited a time lag while also noting that foods that have been bought at the old exchange rate will still be tied to the old exchange rate.

“Whether a month or a quarter, it depends on the duration it takes to order and sell. The effect we should hope to see is that the prices have stopped going up. We call it acceleration.”

President Adeola Adenikinju of the Nigerian Economic Society also emphasized the economic reasoning behind the postponement of price adjustments, echoing comparable sentiments.

Adenikinju stated, “What people have in stock now was purchased at high prices. If they sell at lower prices, they are going to record losses.

“So until they replace the current one, that is when they will reduce their prices.

“But currently, to avoid losses, they will still sell at the rate at which they bought it. We will only start seeing the current prices of things as current stock is sold and new stock is acquired.”

According to Adenikinju, the central bank’s actions in the next few weeks will also reflect what the sellers will do.

Nigeria And Its Battle With Inflation

In March, Nigeria witnessed a surge in inflation, reaching a rate of 33.2%. This increase was mainly driven by a significant rise in food inflation, which soared to 37.92 percent.

To tame the pacing inflation, the CBN raised the benchmark interest rate to 22.75 percent in February from 18.75 percent and further reviewed it upward to 24.75 percent.

According to Professor of Economics, Babcock University, Onakoya Adegbei, the fact that prices go up and never come down is not peculiar to Nigeria.

He said, “Reduction in production usually comes with a lag because of rigidity in production.”

Tags: NairaNigeria's inflation

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Adeluola Abiola

Adeluola Abiola

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