Nigeria forges ahead with subsidy cuts and import controls amid rising inflation

Official data released this Monday (16 November) shows inflation in Nigeria rose from 13.7% to 14.2% in October driven chiefly by higher food prices. NB it has risen every month since the government shut land borders to trade in August 2019.

The government said it wanted to cut food imports and boost domestic production, but institutional weaknesses were not addressed at the borders and within the country. Consequently, food prices have accelerated as the cost of smuggling increased and local companies raised prices in response to the supply disruption.

Electricity and petrol prices have also risen this year - due to cuts in government subsidies. In September, power companies were allowed to increase tariffs for the first time since 2016[1]. And the government’s Nigerian National Petroleum Corporation (NNPC), which imports nearly all the country’s petrol, has hiked its depot pricing and now instructs resellers to sell within a higher price range.

Significance - Diminished resources and reluctant reform

President Muhammadu Buhari’s vision for the country is one “where we grow what we eat and consume what we produce”, Central Bank Governor Godwin Emefiele is fervently pursuing that vision. The bank already barred milk imports in June, and Emefiele has said the bank would get more aggressive in blocking “any or all” food imports in favour of local production. It also assumes a certain level of productivity boosting investment in backbone services[2].

However, the state now has increasingly limited resources with which to implement this import substitution. Revenue has dropped by 60% this year mainly due to the fall in petrodollar inflows (also the top source of foreign exchange). This constrains the fiscal capacity to fix operational bottlenecks or support infant industries.

Given that fall in revenue and dollar inflows, the government is reluctantly cutting energy subsidies to ease its burden and the central bank is struggling to prevent further devaluation of the naira. The bank finally devalued the currency twice this year having previously withstood pressure to do so.

Outlook - Economic risk

Political ambitions around import substitution will continue to take precedence over the central bank’s main goal of price stability. Further, policies to curb imports will remain unpredictable and may be discriminatory against foreign investors, because the policies are not being formed within a clear legal framework. For example, the government recently allowed two local cement firms to export through the land borders even though the border closure remains in force.

Despite contradictions, Nigeria will proceed with the border closure and subsidy cuts for the foreseeable future because there is sufficient political room to do so. The business community has been inclined to give in to the government’s moves, and a recently proposed labour strike over the subsidy cuts is unlikely to materialise in the medium term.

This is because recent anti-police upheaval in the country has unsettled the government, and the crackdown that followed will deter any fresh civil resistance for now.

[1] When the government froze tariffs amid a recession

[2] E.g. Planned 2020 budget transport infrastructure spend

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