Anecdotally, Nigerians are pretty good at adapting to economic challenges. A picture-perfect example is an increase in the pump price of petrol over the years. In 2010, the cost of petrol was ₦67 per litre, by 2015 it had increased to ₦87 per litre. Interestingly, from 2015 to date the price of petrol has more than doubled, despite the government’s subsidy payments (under-recovery).
Under-recoveries are costly to the overall economy. Yet it has provided little to no reason for people to smile, especially as other living costs, including food prices, keep increasing.
Key takeaways:
- Nigerians have shown resilience amidst challenging economic situations. The value of the naira is down by 66% at the parallel market to ₦600 per dollar in the last four years and the price of almost all widely consumed food items like rice, yam, and tomatoes are high. Transport fares are also increasing and the price of
Even in the hardship, Nigerians are getting on with life. We have seen a tech sector boom, birthing unicorns like Flutterwave. The telecommunications industry is thriving, contributing about 12.5% to the country’s GDP. And there is hope for more innovations from a country that is the world’s poverty capital and has its continent's seventh-highest inflation rate.
While Nigerians have been withstanding these economic shocks, the continuous decline in the standard of living is gradually pushing people off the edge. According to the World Bank’s latest Nigerian Development report, added inflationary pressures from the Russian-Ukraine war could push one million additional Nigerians into poverty in 2022. As a result of rising living costs, Nigerians are resounding the chants of “Change”.
But how much more can Nigerian consumers take?
The above question is the motivation for today’s story. And to properly contextualise the answer, it’s essential to see how consumers are currently faring using economic indicators such as GDP per Capita, inflation, exchange rate, unemployment and poverty rates.
Real GDP growth continues to underperform population growth
Between 2015 and 2020, Nigeria’s real GDP per capita was negative. This means that GDP reversed its previous trend of outpacing population growth. A country’s GDP Per capita is the division of its GDP by its population to show how well each person in that economy is doing on average. GDP per capita measures a nation's economic prosperity and health.
From the graph above, there has been a consistent decline in the living standard of Nigerians for the past six years as the population grew faster than GDP. Between 2015 and 2020, Nigeria grew by an average of 0.72%, while the population grew by 2.6%.
When a country’s economic growth is slow, it means that the overall output or economic resources, such as infrastructure, food, jobs etc., is limited and scarce. This situation, coupled with a fast-growing population, now means that the available resources within the country are limited compared to the number of people to use the resources. Think of it like this, the amount of food produced (rice, corn, wheat) in Nigeria is tiny compared to the mouths to feed. Simply put, the continued scarcity of economic resources in the Nigerian economy worsens living standards and creates an unfavourable economic environment.
To further explain how scarce and unavailable economic resources have impoverished Nigerians, let's look at the trend of our actual GDP per capita in US dollars ($). In the early 1990s, Nigeria’s GDP per capita was $1,589, meaning that when dividing the country’s nominal GDP by the population, the average Nigerian earned $1,589. The country was predominantly prosperous, and living standards were high. A better explanation would be that there was enough food to go around, jobs were available, and infrastructure like roads, health and education facilities were also abundant. However, from 1990 to 2020 (in the last 30 years), Nigeria’s GDP per capita has only grown by 50.8%, from $1,589 to $2,396. For context, our population has increased by 121% to about 210 million from 95 million in 1990.
In contrast with another emerging market economy, China, Nigeria has done poorly in improving the living standards of its citizens. In the early 1990s, Nigerians were better off than the Chinese, as Nigeria’s GDP per capita ($1,589) was 76% higher than China's ($905). Forward to 30 years later, GDP per capita in China has grown to $10,430 from $905, while Nigeria is managing a 50% increase in GDP per capita growth rate within the same period. Today, China’s GDP per capita ($10,430) is four times bigger than Nigeria’s ($2,396), a 335% increase.
It is important to note that for a country to successfully ensure that economic output (GDP) is growing faster than its population, technological advancements, innovation, adequate infrastructure, and a thriving industrial sector are key factors to maintain. The goal often is to attain self-sufficiency—a situation where an economy utilises its factors of production (land, labour, and capital) to produce goods and services and improve living standards. And this is what China has done over the years. Meanwhile, Nigeria still battles with poor road, electricity, and port infrastructure, among other economic issues.
From the above metrics, we see that the health and prosperity of the Nigerian economy are dwindling. And the abysmal state of the economy is trickling down to the masses, leading to low living standards.
As if the slow growth in GDP Per capita was not enough, the value of the naira is also decreasing and affecting the living standard of Nigerian consumers.
The dwindling value of the naira is not helping
The exchange rate is an important metric to assess how consumers are faring because there is a direct link between the value of the country’s currency and the price of domestic commodities.
The value of the naira has fallen by 66% in the parallel market (black market) and by 15% at the official window (IEFX) in the last four years. The main reason for the decline in the value of the country’s currency is forex scarcity. Nigeria is not earning enough forex, limiting the Central Bank of Nigeria’s (CBN) ability to defend the naira at the official window.
Unfortunately, this is happening because the country's significant sources of forex income are declining—oil exports, foreign investments (portfolio and direct) and remittances. For oil, due to our limited oil production levels as a result of vandalism and theft, our exports are declining.
In terms of investments, investment inflows are also falling because the country is in election season, coupled with rising insecurity and the rising risk of a debt default. Meanwhile, the high cost of living in advanced countries like the UK and the US will likely slow down the increase in diaspora remittance inflows, which rose 2% to $17.6 billion in 2021 from $17.2 billion in 2020.
All these do is reduce the forex level available to the CBN. Our foreign reserves have declined by $1 billion this past month, from about $39 billion in May to $38 billion in June this year. The lower the forex, the more difficult it is for the CBN to support the naira. The explanation is that forex demand from businesses and people travelling overseas is rising. So rising demand is meeting low supply, essentially increasing price (exchange rate) at all the foreign exchange markets (parallel and IEFX). And the higher the exchange rate, the less the currency's value.
This affects consumers because the decline in the naira’s value is closely intertwined with the importation of food items. As of May 2022, Nigeria’s imported inflation has risen to 17.7% from 17% in May last year. Nigeria is still a net importer of several goods. As companies have to spend more naira to import commodities (mainly in US dollars), they reflect the import costs in the domestic prices of the commodities. For example, the higher Flour mills' wheat imports, the higher the domestic price of flour and bread.
Speaking of higher domestic commodity prices, inflation is also rising and reducing the value of whatever income Nigerians earn.
Inflation is eroding consumer disposable income
Inflation as a macroeconomic indicator shows us the rate of increase in prices of goods and services across a country and the decline in purchasing power of consumers as the value of the country’s currency also falls. Higher prices lead to a fall in the value of people’s income and then reduce the real purchasing power of consumers. Nigeria’s headline inflation is currently at a record high of 17.72%. For context, this is 8.72% above the CBN’s inflation target ceiling of 9%. Also, the CBN believes that inflation above 12% decreases economic growth.
A further breakdown of the numbers shows that food inflation, which covers the price of food items like bread, cereals, fish, and rice, has also been increasing. People are spending more on food items than a few years ago. The same applies to core inflation (inflation less seasonalities). Core inflation covers services like barbing, health care and products like energy items like fuel, diesel and kerosene. All of which have been increasing.
As energy prices rise, so is the cost of commuting from one place to another. In Nigeria, the cost of all forms of transportation is increasing, and this is also fueling inflationary pressures. For example, some of the buses used for commercial transportation (intercity and intracity) run on diesel. And with the average diesel price now more than double its price last year (a 181% increase), transporters are passing the burden to commuters. Also, fuel scarcity is rearing its ugly head again. The attendant impact is an increase in the pump price of PMS that will also reflect in transport costs. Whether you commute by air, road or water, everyone has been paying more for transport.
Another example of how Nigerians pay for higher transport costs (as a result of rising energy prices) is through food prices. There is a linkage effect. Here’s an example to explain. Regarding the transportation of food items, the cost of diesel is reflected in the price of the commodities. This is because trucks used for haulage (movement of goods) run on diesel, and the retailers or wholesalers in an open market like Oyingbo in Lagos, are expected to pay for the increased cost of diesel before receiving their goods from, say, Bayelsa state. This increased cost will then be passed to the consumers.
Besides food, transport and energy costs, Nigerian consumers also pay more for rent. No matter where you live in Lagos (except you have a house of your own), your landlord has probably increased your rent to factor in the increase in inflation and other household running costs. The sad thing is that your income has not yet grown.
However, rising inflation is currently not Nigeria-specific. For example, inflation in the United States is at a 41-year high of 8.6% as global energy prices stay high due to the Russian-Ukraine war. But, Nigeria’s inflation has been increasing even before the covid-19 pandemic and the Russian-Ukraine crisis. The primary culprits have been poor agriculture infrastructure to mitigate the impact of seasonality (planting and harvest) and insecurity, limiting food supply across the country. The border closure in August 2019 and the CBN’s forex restriction on most food imports are also inflation-stoking factors.
Other factors influence the rise of Nigeria’s inflation, like the increase in the money supply. Nigeria’s money supply (M2) has recently grown by 21% from ₦38.5 trillion in April 2021 to ₦46.5 trillion in April 2022. In economic theory, an increase in money supply which could be due to a rise in printing new currency (ways and means), intensifies inflationary pressures because there is now too much money chasing too few goods.
Let's look at this hypothetical situation to visualise what inflation has done to your income.
Imagine an individual has been earning ₦200,000 for the past five years (2018-2022). Now, inflation has been rising. Meanwhile, the individual’s income has remained constant. When you discount the individuals’ ₦200,000 with the inflation rate for each year, it tells the actual (real) value of that ₦200,000. By real value, I mean the worth of goods and services the individual can buy with ₦200,000. If this person goes to market with ₦200,000, they can only purchase goods worth a certain amount. Here’s a breakdown for each year,
In 2018 when inflation was 11.44%, the person could buy goods worth ₦177,120
In 2019 when inflation was 11.98%, the person could buy goods worth ₦176,040
In 2020 when inflation was 15.57%, the person could buy goods worth ₦168,500
In 2021 when inflation was 15.63%, the person could buy goods worth ₦168,740
Today, with inflation at 17.72%, the person can buy goods worth ₦164,560
The faster inflation rises in Nigeria, the lower your purchasing power. And until the issues that affect Nigeria’s inflation, like insecurity and poor agriculture infrastructure, are addressed, inflation will continue to rise, and this will continue to water down the value of your income as time goes on.
There are fewer jobs for a fast-growing working population
We have examined how GDP, inflation, and the exchange rate affect Nigerian consumers. But are there socio-economic factors that can help to combat these challenges?
Starting with employment, we see that Nigeria’s unemployment rate has continued to rise over the past few years. Nigeria has the third-highest unemployment rate in the world after South Africa (34.5%), and Namibia (33.4%). It's important to note that unemployment, which is the situation when skilled labour cannot find gainful employment, is ubiquitous. All countries have a certain degree of unemployment, primarily due to various factors such as voluntary employment transitions, recession, technological advancements and government policies. The globally acceptable rate is between 4% and 6%.
However, in Q4’20, Nigeria’s unemployment rate climbed to the highest level in seven years (33.3%). This explains that there are fewer jobs for a growing working population. Nigeria’s youth make up over 50% of the entire population, and the working population has grown by 19.9% to 122.05 million, from 101.8 million in 2014. In addition, the limited job opportunities force many within the working-age to accept menial jobs within the informal sector where they are underpaid. This has led to a rise in the country's underemployment rate (22.84%). With the increase in joblessness and double-digit inflation (17.72%), Nigeria’s misery index is at a new high of 51.02%. The misery index shows the economic distress people feel due to the risk of unemployment combined with an increasing cost of living. Sadly, as the Nigerian business environment becomes increasingly hostile and challenging for companies to operate due to rising costs, staff layoffs and salary deductions will most likely happen instead of companies employing more people.
As more people are unemployed, so does the level of poverty increase. No jobs equal no income. Also, as the general price level of commodities rises, so does the level of poverty increase because more people fall below the poverty line of living below a dollar per day. 81 million Nigerians live in extreme poverty (39% of the country’s total population). The World Bank has also said that higher food prices (inflation shock) pushed an additional eight million people into extreme poverty between 2020 and 2021.
In a nutshell, unemployment and poverty levels could keep rising as the Nigerian economy continues to efficiently allocate scarce resources and address ongoing issues like insecurity and policy uncertainty that affect the ability of businesses to employ more people.
Sadly, the double whammy of the lingering impact of covid-19 and the Russian-Ukraine war will make things more difficult. And truthfully, as we move closer to the election season, it might get worse. Additionally, as the federal government struggles to generate income from foreign sources to improve the social welfare of people by providing better infrastructure facilities (health, education, roads etc.), it could resort to ways and means and aggressive taxation schemes.
Recently, the government suspended its $950 million Eurobond issuance because investors were asking for higher interest rates that would be unsustainable for the Nigerian economy in the coming years. The government is broke and needs money by any means necessary.
The government will impose more taxes. And, in that case, businesses are unlikely to employ more people because they would prioritise cutting costs to stay afloat. This means that the loop of rising unemployment and poverty rates could continue. Also, if the government resorts to more means and means advances (printing money), it would resort to a sharp rise in money supply, fueling inflation and continuing to erode consumer disposable income. Ways and Means advance from the CBN to the federal government are already at a record high of ₦19 trillion. We have spoken about how detrimental this is to the Nigerian economy.
Consumers are the receiving end of every equation, and it would continue to taper living standards.
How will consumers respond to rising prices?
From all the indicators we have analysed, we see that Nigerian consumers are faring pretty badly. And the most obvious response from consumers would be to reduce their costs as much as possible. People who used to enjoy going to fancy restaurants weekly will probably reduce it to once a month. A family who used to consume a three-square meal will likely reduce it to two. Also, people could reduce their demand for numerous commodities, basically rationing. So, if you used to buy a kilo of chicken, you’d probably resort to buying half a kilo.
Remember the national income identity equation (Y= C + I + G + X-M)? With the independent variables—consumption, investment, and net exports—declining, the overall growth in the Nigerian economy will be negatively impacted. Inevitably, the loop to consumers (trickle-down effect) also continues, highlighting the urgency for better governance and leaders that can make positive and effective economic decisions.
