Following the events that affect the economic aspect of the country, there are signs that bigger economic crises are about to happen.
Nigeria could be headed for a severe economic crisis that is riddled with high cost of goods and services and a contracting economic growth rate if it doesn’t take urgent steps to fix things.
Going by the data from the National Bureau of Statistics, Nigeria’s inflation rate for the month of May is around 17.7%.
As alarming as this data is, most Nigerians may have an even worse experience when it comes to the prices of goods and services.
For many households, consumer goods such as groceries, beverages and provisions have more than doubled in price since last year.
In addition to households, companies operating in the country also recorded spikes in operating expenses and had to rely on price increases to offset the impact.
With the signs appearing every day, we can only begin to imagine that the worst is yet to come.
Diesel traders recently warned that the price of diesel could rise to N1,500 per litre, citing rising global oil prices, the effect of the Russo-Ukraine war and a general supply stalemate across the world.
Diesel prices immediately rose to N800 per liter from around N650 per liter in May. Diesel prices, which used to be N350 per litre, have more than doubled in recent weeks.
Earlier this week, the Independent Petroleum Marketers Association of Nigeria (IPMAN) announced that most of its members had closed archiving stations due to what they called operating in ‘hostile’ environments.
Electricity prices are also expected to rise as another tariff review approaches in the coming months. Tariffs have more than doubled in the past two years for Nigerians, even as energy supplies remain epileptic.
Furthermore, the exchange rate has surpassed N600 per US$1. This is the first time in Nigerian history that the exchange rate has surpassed N600 per US$1, widening the disparity with the official rate to around N180 per US$1.
The Nigerian stock market, which is often an indicator of the economy, was also affected. Equities are currently down and more than N2 trillion has also been pumped into treasuries despite negative real interest rate returns, suggesting investors are flying to the safety of government-backed bonds.
While these signs remain apparent locally, events across the global economy also point to a possible global economic contraction.
Some analysts are already predicting a global recession that could trigger a major financial crisis, especially in Western economies. The impact of rising inflation in the West has already led to record interest rate hikes in the US, EU and UK, forcing a market sell-off that has rocked cryptocurrencies and equities.
Recently, US President Joe Biden accused the world’s biggest shipping companies of raising freight rates to transport 40-foot containers from around $1,300 pre-pandemic to over $8,000. The impact is already being felt on global inflation and this is also seeping into the Nigerian economy. The increase in the price of diesel and fuel is an important point.
All these signs point to a massive economic recession that could happen in Nigeria in the coming weeks and months. If fuel and diesel prices rise as projected and still remain scarce, there could be massive food shortages and shortages of essential items needed by ordinary Nigerians to survive.
This will force companies to raise their prices even further, further stifling demand for goods and services as the purchasing power of Nigerians is decimated. The exchange rate may drop to N700 for $1 much sooner than we expect and yet it is still hard to find.
As companies struggle amid diminishing demand, they may be forced to cut their losses by downsizing, triggering mass unemployment.
The ripple effect this could have on the security situation in the country could be catastrophic.
In 2020, when we face a similar crisis brought on by the Covid-19 pandemic, Nigeria’s central bank mobilized billions of naira in intervention funds to essentially support the public and private sectors. The IMF also helped Nigeria with the essential supply of dollars through structured loans, helping to stem the exchange rate decline.
It is unlikely that this option will be available to use as the apex bank is currently stumped with so many challenges to deal with. Politicians are also busy campaigning, paying little or no attention to the rapidly degenerating economic situation.
According to Naira Metrics, a possible option will be to borrow to fill the revenue gap. A large supply of Eurobonds can help alleviate the challenges, although this too comes at a cost, especially if we don’t find the revenues to pay for it in the future.
Nigeria can also put the cap on the IMF and World Bank to boost forex, especially through new multilateral lending. This will come at significant cost and conditions, one of which may be to fully deregulate the downstream sector (removing the subsidy) and allow the naira to fluctuate.
Nigeria needs urgent intervention to avoid a potential economic crisis. At this point, it does not matter whether this intervention is divine.