Despite the Naira’s recent gains against major foreign currencies, prices of goods and services in Nigeria are unlikely to decrease anytime soon. This is because the exchange rate’s impact on prices takes time to materialize.
Additionally, prices tend to rise quickly in response to increases in production costs but are slow to decrease when these costs go down.
On Thursday, US Dollars traded for N1,060, about N840 gain against N1,900 to US Dollar peak in February this year.
Other factors contributing to the delay in price decreases include high energy and transportation costs, which have remained unchanged despite the Naira’s appreciation.
Furthermore, Nigeria’s heavy reliance on foreign currency and inadequate government support for local manufacturing hinder the effectiveness of exchange rate changes in reducing prices.
Businesses may also be hesitant to lower prices due to uncertainty about the sustainability of the Naira’s appreciation, leading to “sticky prices.” Moreover, the economy’s structural issues, such as insecurity and inefficient distribution networks, continue to drive inflation.
Experts predict that prices will eventually decrease, but not until the exchange rate’s impact has had time to trickle down and other cost factors have decreased.
They also emphasize the need for fiscal policies that promote local production and address structural bottlenecks to achieve sustainable price stability.
Explaining the discrepancy between the exchange rate stability against consumer price volatility, Victor Chiazor, Head, Research, FSL Securities, a Lagos-based investment house, told Vanguard, ‘‘Apart from the time lag for the stability in the exchange rate to begin to reflect in the prices of goods and services, Nigerian price history shows that prices are sticky downwards but reflect immediately upwards.”
However, he gave further insight: “The rise in consumer goods prices was initially triggered by the currency devaluation along with high energy and transportation costs. But despite the recent appreciation of the Naira against the dollar, energy and transportation costs have remained high.
“Also, the appreciation in Naira will take some time to kick in before it begins to reflect in the price of goods and services.
“This price distortion shows how much dependence the economy has on foreign currency and shows that government policies towards locally manufactured goods in terms of infrastructure deficiency and incentives remain low.
“Just as we have seen inflation continue to rise despite consecutive increases in the monetary policy rate to curb it, the reality remains that the policy will require some time to kick in and take effect.
“A similar scenario is expected to play out around goods and services which are highly dependent on the exchange rate. It will take some time for the appreciation of the Naira to be transferred and trigger a drop in the cost of goods and services.”
Going forward, he said that the current policy decisions by the CBN Monetary Policy Committee, MPC, team will yield the desired result.
He, however, said that a prolonged duration of monetary tightening would become a headwind negative to economic growth.
“Hence, there is the need to effectively monitor the economy and know when to slow down on its tightening stance so as not to throw the economy into a session of negative growth.”
In his views, Ayorinde Akinloye, an Economic and Investment Strategist, said: “When economic policies are implemented, there is typically a time lag needed to see the impact of the policies on macroeconomic outcomes.
“Specific to the issue of appreciating Naira and still elevated prices of goods and services, the majority of consumer goods in circulation were produced or imported when the dollar was about N1,500 or more. As a result, we are yet to see the impact of the appreciation of the past month.
“Typically, a time lag of 60 – 90 days will be required to clear out the expensive goods before the ones imported at cheaper exchange rates begin to flow into the market.”
He, therefore, noted that the impact of the appreciation of the Naira will be felt from the end of May to June.
Breakdown: Reasons why prices of goods and services are not decreasing in Nigeria
– The recent appreciation of Naira against the US Dollar will take some time to reflect on the prices of goods and services
– Prices are sticky downwards, meaning that they respond faster to upward increases in key factors of production but the reverse is the case when the factors are going down
– Energy and transportation costs have remained high despite the recent appreciation of the Naira against the dollar
– Inflation is a lagging indicator, meaning that the effect of policy pronouncements in a given month will not be evident until subsequent months
– The main factor fueling Nigeria’s galloping inflation is insecurity, adding that import dependence on manufactured items is another cause
– The economy is heavily dependent on foreign currency and government policies towards locally manufactured goods in terms of infrastructure deficiency and incentives remain low
– Businesses may wait to adjust prices until they’re confident the currency appreciation is sustained
– Inventory purchased at higher exchange rates may also need to be sold before price reductions occur
– Factors like high transportation costs, insecurity, or inefficiencies in distribution networks can keep prices high despite a stronger currency and businesses might be hesitant to lower prices immediately, fearing future devaluation, leading to “sticky prices”
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