Nigerians have complained that despite the naira’s gains in the past week, the costs of goods and services remain high.
Recall that the naira miraculously recovered to N680/$ after reaching an all-time low of N900/$. Black market traders attributed the sudden improvement to eased demand and increased inflows of FX in the market.
When the naira reached its all-time low, market participants reacted by rapidly raising their prices. However, now that the exchange rate has appreciated, prices are not falling as quickly, resulting in a price rigidity situation, otherwise known as price stickiness.
Price stickiness: In his book The General Theory of Employment, Interest, and Money, John Maynard Keynes identified how easy it is for prices to rise compared to how difficult it is for prices to fall.
Price stickiness, also known as sticky prices, refers to a price’s tendency to remain constant or slowly adjust despite changes in the cost of producing and selling the goods or services.
In the case of Nigeria, prices quickly adjusted upwards on news that the cost of goods would rise due to the depreciating naira. Now that the exchange rate has stabilised, prices have failed to respond accordingly.
What Nigeria is saying: As expected, many Nigerians have noticed the stocky prices. And as typical of them, they took to social media (Twitter to be precise) to vent their frustration.
A Twitter user identified as Sadiq Dambatta lamented about vendors’ failure to reduce prices now the exchange rate has strengthened. He said:
- “Naira has appreciated, but prices are still the same because it’s old stock from when the dollar was high, but there was no old stock from when the dollar was low when exchange rates were high. It’s okay. Forget the leaders for a minute we are our problem.”
Another Twitter user, Able, said the price of goods and services needs more time to adjust to the favourable price change. He said:
- “Naira just appreciated like 2 days ago, and suddenly everything wants to see a drastic drop in the price of goods. Nigerians are funny 😄 The increase in the price of goods didn’t happen suddenly. Peak milk didn’t just go from 50 nairas to 100naira. It was gradual. So give it time.”
Eniola Akinkuotu seemingly supported the point made by Able, arguing that traders who incurred huge costs due to high exchange rates cannot afford to run at a loss. He said:
- “A car dealer who bought a dollar at N850 in order to import cars will not reduce the cost of his car because the dollar has now hit N690. For Nigerians to enjoy lower prices, the naira has to be more stable than it is. It is not the rate that scares investors. It’s the instability.”
User, @kingslerz, expressed a similar sentiment, saying:
- “You bought something at N5 when the dollar was high, and you want to sell it at N3 because the dollar has come down… Abeg make una dey reason… For me, I will have to sell my old stock finish before aligning.”
For Stephen Ojeme, the unpredictable nature of the exchange rate is affecting vendors from pricing appropriately. He said:
- “Stop blaming Nigerians! In an unstable economy, reduced prices today could get your fingers burnt tomorrow. The effect of $ on the economy isn’t so much a direct one. It’s the many other things that are affected by the rate of $ to Naira that informs rise in the price of goods being sold.”
What you should know: Nigeria’s already high structural inflation has been aggravated by global commodity price spikes and supply constraints. Annualised inflation reached a 17-year high point of 20.8% in October 2022.
In Fitch’s recent report inflation forecasts is to average 19% in 2022 and fall only moderately to 17.8% in 2023. By comparison, the ‘B’ median is 8.5%. The CBN raised the monetary policy rate three times by a total of 450bp in 2022 and has used the cash reserve ratio to periodically remove liquidity from the domestic banking sector.
Furthermore, A Professor of Applied Economics at Johns Hopkins University, Professor Steve H. Hanke, has argued that the actual inflation rate in Nigeria is worse than what is being reported by the National Bureau of Statistics.
Based on Hanke’s Inflation Dashboard, the inflation rate in Nigeria is an eye-popping 52%, not the 20.8% official record reported for September 2022.
This is what artificial inflation and risk lead to – business people have no confidence that the Fx rate will stay low when it’s time to replenish their stock – hence they hedge by keeping prices high