It all began with the value of the naira against the dollar. At the start of the year, the exchange rate was 1,500 naira to the dollar, but by mid-March, it had depreciated to 1,900. Following this significant depreciation, the naira began to recover against the dollar and has strengthened to a current rate of 1,100 naira to 1 dollar.
The appreciation of the currency against the dollar has been seen as a positive sign for Nigerian citizens who had been severely impacted by the earlier decline.
Prices of goods in the market experienced a significant increase during this period, partly due to the naira’s depreciation against the dollar.
However, despite the recent improvement in the value of the Naira, there has not been a corresponding reduction in the prices of commodities. This current position has raised speculations as to the factors affecting the unchanging prices of commodities.
A commonly expressed opinion is that the absence of a corresponding reduction in prices could be attributed to Nigerian business practices, often summarized by the adage, “nothing comes down in Nigeria.” This sentiment suggests that once prices increase, they rarely decrease, even after the initial reasons for the hike have been addressed.
While this perspective may partially explain the inflationary trend, other factors contribute to the sustained high prices despite the naira’s recent appreciation against the dollar.
Price of fuel and other factors of production:
Fuel prices and other factors also play a role.The value of the naira has an indirect impact on the prices of commodities in the market, affecting only a few imported goods directly. For locally produced goods, the impact of the naira can be seen in the production process. For instance, in the production of sachet water, the devaluation of the naira affected the prices of raw materials such as nylons and water treatment chemicals, as well as the cost of diesel and fuel used to power machines and engines for production. Additionally, there has been an increased electricity tariff charge for industries and factories, which further influences prices.
Tax rates and custom duties
High tax rates and customs duties on imported goods also affect commodity prices. Traders must evaluate and balance the cost of imports against the value of the naira and the taxes imposed, while also considering their profit margins.
Bulk purchase of imported goods
Moreover, importers often buy goods in bulk and store them in warehouses. A trader who imported goods during the February hike would be unwilling to sell at a reduced price in March due to the naira’s appreciation, to avoid incurring losses.
Traders trust issues
The wariness of traders regarding the potential fluctuation of the naira is another significant factor, as business owners aim to avoid losses in an unstable market.
Given these complexities, the current inflation can be attributed to a combination of trust issues that traders have with the naira and their desire to avoid losses on already purchased goods. It remains to be seen if the naira can sustain its current value over the next three months, allowing for a more informed assessment of the lack of reduction in commodity prices.
