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Why Prices of Goods Will Remain High Despite Naira Appreciation, Experts Say

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Why Prices of Goods Will Remain High Despite Naira Appreciation, Experts Say
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Despite the recent appreciation of the Naira against major foreign currencies, prices of goods and services are expected to remain high in the Nigerian market. The exchange rate between the Naira and the US Dollar has improved, with the US Dollar trading for N1,060 compared to its peak of N1,900 in February. However, market prices have continued to rise instead of going down as expected.

Many dealers and producers attribute the increase in prices to the high exchange rate. Additionally, the National Bureau of Statistics reported a further rise in inflation, with a headline rate of 33.2% in March and food inflation reaching 40.02%. Financial analysts and economists predict that prices will continue to rise in the coming months before any marginal stability can occur.

The delay in the impact of the exchange rate on prices is due to several factors. Prices tend to respond quickly to upward increases in production costs but are slower to decrease when costs go down. The positive changes in the exchange rate take time to trickle down to consumer goods prices. Furthermore, the high energy and transportation costs, along with infrastructure deficiencies and low incentives for locally manufactured goods, contribute to the persistent high prices.

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Experts believe that the current policy decisions by the Central Bank of Nigeria’s Monetary Policy Committee will eventually yield the desired results, but a prolonged period of monetary tightening could negatively affect economic growth. They suggest closely monitoring the economy to determine when to slow down on tightening policies and avoid a period of negative growth.

To see a significant impact on prices, it will take time for the appreciation of the Naira to affect goods and services in the market. The majority of consumer goods currently in circulation were produced or imported when the exchange rate was higher, so a time lag of 60-90 days is needed for the expensive goods to clear out and cheaper goods to replace them.

While a stronger Naira is expected to reduce import costs and consumer goods prices, other factors such as structural issues, time lags, and speculative pricing have contributed to the current disparity. Businesses may wait to adjust prices until they are sure the currency appreciation is sustained, and existing inventory purchased at higher exchange rates needs to be sold first. Additionally, transportation costs, insecurity, and distribution inefficiencies can keep prices high despite a stronger currency.

Going forward, aside from the Naira’s strength, policy changes and reforms by the fiscal authority are crucial to achieving sustainable price stability. Structural bottlenecks in the economy need to be addressed, and policies that incentivize local production of essential goods should be implemented to reduce reliance on imports and make prices less vulnerable to fluctuations.

Inflation in Nigeria is primarily fueled by insecurity and import dependence on manufactured items. Supply-side measures and addressing these factors are key to reducing inflation, which may start declining from the fourth quarter. Inflation is a lagging indicator, so the effects of policy pronouncements will not be immediately evident, but a marginal decline in the rate of inflation is expected in the coming months. A significant decline may not occur until the third or fourth quarter, but a gradual moderation on a month-on-month basis is anticipated.

Tags: 9jaspectatorsConsumer goodsEconomic growthExchange rateFiscal authorityForeign exchange marketImport costsInflationInflation bottleneckLagging indicatorMonetary policyNaira appreciationPrices of goodsspectatorsngStructural reforms
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