Over the past few weeks, the naira has appreciated from a record low of around N1,900/dollar to N1,148/dollar as of April 12, prompting the US investment bank, Goldman Sachs, to pronounce it the best performing currency in the world in April.
This has come as a reprieve to many Nigerians who have been battered by the negative effects of the seemingly perpetual and unstoppable depreciation of the naira against the dollar. One of the areas where Nigerians have felt the pangs of the weak local currency is in the prices of goods and services. Prices of everyday goods, including staple foods and household items, seemed to soar with every visit to the market. This also manifested in higher transportation costs, utility bills and other services.
This synchronized rise in the prices of goods and services with the depreciation of the naira is largely a result of the country’s huge dependence on imported goods.
A large chunk of all the products used in the country are imported, including many consumer and industrial goods like milk, sugar, petrol, vehicles, and machinery. It is unsurprising then that the prices go up as the cost of importing them becomes higher.
Even service providers, who do not directly sell imported goods, will be forced to hike their prices in such a scenario in order to remain profitable as they utilize one imported product or the other in their day-to-day operations. This creates a vicious cycle that fuels inflation.
But, as many of you have wondered, why haven’t the prices of goods and services come down since the naira has strengthened steadily against the dollar and other major global currencies in the past few weeks? Well, this is related to a variety of factors, including price stickiness.
Price stickiness occurs when businesses do not immediately bring down the prices of their goods and services because of the higher cost of their current inventory.
Many of the products still in circulation today were imported or produced when the exchange rate of the naira to the dollar was very low. It is usually when they exhaust their old stock and purchase or manufacture new ones that the prices will adjust, all things being equal.
That way, they do not unusually incur losses and cut into their profit margins by selling at a rate lower than the original cost price.
Another factor that is keeping the prices of goods and services high is psychology, or the fear that the naira’s gain against the dollar is temporary and the currency will depreciate again in the near future.
Simply put, if businesses expect the naira to weaken against the dollar anytime soon, they may be hesitant to lower the prices now. This waiting game can further delay the decrease in consumer prices.
For businesses in the service industry that do not sell physical products, additional considerations like high operating cost can contribute to price stickiness.
Many service providers rely on imported goods and equipment for their daily operations, from office supplies and cleaning materials to tech hardware.
Wages and salaries adjusted upwards when the naira was weaker may also not be reduced even with the stronger naira. Reducing salaries is a delicate and controversial move that can dampen workers’ morale. Keeping the salaries and overhead costs high while reducing the prices of the services provided can squeeze the profit margins of these businesses.
All in all, the effects of naira’s appreciation may take some time to trickle down to consumer prices due to some of the factors pointed out above.
Businesses typically factor in not just the current exchange rate, but also their past purchases, the overall cost of production and future uncertainty. While a stronger naira is a welcome development, Nigerians might need to be patient for its full impact to be felt by consumers.
By Chinedu George Nnawetanma
- Chinedu George Nnawetanma is a business and development strategist with experience and interest spanning banking, local economic development, digital inclusion, financial literacy, and business advisory.
