Inflation hike drags 7m Nigerians into poverty– World Bank
…food inflation, heightened insecurity, unemployment erode economic growth
by Aanuoluwapo Olaleye and Kayode Tokede
The World Bank on Tuesday said the increasing inflation rate that led to rise in price of food and services pushed an estimated 7 million Nigerians below the poverty line in 2020.
The National Bureau of Statistics (NBS) on Tuesday reported inflation rate of 17.93 per cent in May 2021 from 18.12per cent recorded in April 2021.
Inflation rate in Nigeria reached its peak of 18.12per cent in April 2021, highest since 2017.
However, the World bank in its Nigeria Development Update (NDU) released Tuesday said Nigeria’s economic growth is being hindered by food inflation, heightened insecurity, unemployment and stalled reforms.
According to the update, persistent inflationary pressure is driven largely by accelerating food prices, while the nation’s inflation rate rose steadily throughout 2020 and reached a four-year high in March 2021.
Lead economist for Nigeria and co-author of the report, Marco Hernandez, explained that inflation, especially in food prices, was exacerbating poverty and food insecurity in the country.
The report states that the World Poverty Clock shows that there has been a rise in the number of Nigerians that slipped into extreme poverty within the period.
On Tuesday, the World Bank gave a Gross Domestic Product (GDP) growth forecast for Nigeria of 1.9per cent in 2021 and 2.1per cent in 2022, compared with 3.4per cent this year and four per cent next year for sub-Saharan Africa.
The report indicates that while the government took measures to protect the economy against a much deeper recession, it would be essential to set policy foundations for a strong recovery.
The NDU, titled “Resilience through Reforms,” notes that in 2020 the Nigerian economy experienced a shallower contraction of -1.8per cent than had been projected at the beginning of the pandemic (-3.2per cent).
Although the economy started to grow again, the report said prices are increasing rapidly, severely impacting Nigerian households.
“As of April 2021, the inflation rate was the highest in four years. Food prices accounted for over 60% of the total increase in inflation,” it stated in a separate release.
Meanwhile, the report acknowledges notable government’s policy reforms aimed at mitigating the impact of the COVID-19 crisis and supporting the recovery. These include steps taken towards reducing fuel subsidies and adjusting electricity tariffs towards more cost-reflective levels, both aimed at expanding the fiscal space for pro-poor spending.
In addition, the report highlights that both the federal and state governments cut non-essential spending and redirected resources towards the COVID-19 response, adding that public-sector transparency has improved, in particular around the operations of the oil and gas sector.
The report, however, noted that despite the more favourable external environment, with recovering oil prices and growth in advanced economies, a failure to sustain and deepen reforms would threaten both macroeconomic sustainability and policy credibility.
This will limit the government’s ability to address gaps in human and physical capital which is needed to attract private investment, the bank said.
“Nigeria faces interlinked challenges in relation to inflation, limited job opportunities, and insecurity,” said Shubham Chaudhuri, the World Bank Country Director for Nigeria.
“While the government has made efforts to reduce the effect of these by advancing long-delayed policy reforms, it is clear that these reforms will have to be sustained and deepened for Nigeria to realize its development potential.”
The World Bank in its report proposed near-term policy options aimed at reducing inflation by implementing policies that support macroeconomic stability, inclusive growth, and job creation.
It also called for protection of poor households from the impacts of inflation, adding that government must facilitate access to financing for small and medium enterprises in key sectors to mitigate the effects of inflation and accelerate the recovery.
“Given the urgency to reduce inflation amidst the pandemic, a policy consensus and expedite reform implementation on exchange-rate management, monetary policy, trade policy, fiscal policy, and social protection would help save lives, protect livelihoods, and ensure a faster and sustained recovery,” said Hernandez.
The World Bank blamed the Central Bank of Nigeria’s (CBN) management of the foreign exchange regime as the reason for the FX crisis currently being experienced in the country.
According to the World Bank, the CBN’s management of the exchange rate reduced supply in the market thus affecting investor confidence and ultimately leading to a ditch of the official market for the black market.
“The way the exchange rate was managed limited access to FX and thus adversely affected investors confidence and investment appetite,” the World Bank stated.
The disparity between the official I&E Foreign Exchange Window (IEFX) and the parallel market has widened to as high as N90 in recent weeks due to a combination of speculation, demand and fear of future devaluation of the currency.
“Significant spreads between the official, the IEFX, and the parallel exchange rate persisted throughout 2020 and as of April 2021, the spread between the official and the IEFX rate was estimated at eight per cent and between the IEFX and the parallel rate, reached 18% (the spread between the official and the parallel rate was 27per cent),” the World Bank added.
The CBN recently made its biggest move yet in unifying the exchange rate after it dumped its long-held official rate for the IEFX rate published by the FMDQOTC. In addition, it recently also extended the Cash4Dollar scheme introduced back in March hoping this will drive more diaspora inflows into the banking system.
Despite these moves, most critics believe it has come late and may have been avoided, had the central bank been more pragmatic. The World Bank also blamed the apex bank for not going all in with its change in policies.
“In May 2021, the CBN formally took concrete steps towards rates unification between the official and IEFX rates. However, the IEFX rate continues to be managed and is not fully reflective of market forces. Furthermore, there remains a 20 percent premium between this unified rate and the parallel market rate. The two-month naira-for-dollars scheme introduced by the CBN in March 2021 to serve as an incentive for increased remittance inflows through formal channels was extended indefinitely in May and was preceded by regulatory directives in December 2020—that mandated all licensed operators to pay remittances in dollars. While this may indeed encourage the use of the formal channels, it is not clear that incentive payments will increase remittances to the country,” the World Bank stated.
The World Bank also made recommendations of what the central bank should do to address the issues of forex shortages and exchange rate disparity. It called on the CBN to allow the IEFX market function as it should by allowing a more market-friendly approach for exchange rate transaction. Rather than allow an unreliable way of reporting exchange rate prices, it called for a two-way quote which allows banks to quote for their bid and offer prices just the way it is done in the stock market.
It also called for higher participation of oil companies in providing FX supplies, believing this will be achieved if the market is more transparent and flexible. The World Bank believes a return to a flexible exchange rate regime (post-2015 and pre-2020) will allow for limited interventions by the CBN.
The World Bank recommends that “While the CBN has taken steps towards operationalizing unification of exchange rates, greater flexibility will be necessary to support the recovery. Until oil companies are allowed to sell FX receipts to IEFX bank participants, CBN would still have an important role to play as supplier of FX. In this scenario, participating banks in the FX market will start to play an expanded role that goes beyond just executing buy/sell orders of its clients to start acting as market makers, meaning that they start to quote two-way prices buying and selling on its own behalf and carrying a stock of FX. With increased flexibility, the CBN could start intervening only to smooth large fluctuations and work toward ensuring a single, market-driven rate. Keeping market stakeholders fully informed of such efforts would help attract both domestic and foreign investment. The right mix of exchange-rate flexibility and expanded supply (e.g., through banks and FX agents) would enable the FX market to efficiently allocate resources, which would allow the CBN to focus its interventions on smoothing large and disruptive FX fluctuations.”
