Avoiding policy missteps over rising costs, prices

The current effort by the government to control the prices of staple foods is a bad way of doing a good thing. It will not go far in achieving its objective unless it takes into account the reason for the surge in prices. Without establishing such a link, the current tendencies toward price control will […]

The current effort by the government to control the prices of staple foods is a bad way of doing a good thing. It will not go far in achieving its objective unless it takes into account the reason for the surge in prices. Without establishing such a link, the current tendencies toward price control will produce a disincentive in the economy.

We have floated the naira, effectively devaluing it significantly. The real rates that banks charge their customers today hovers around 27 per cent, inflation is at 22.79 per cent, and the price of petrol is about N617 per litre. Therefore, any talk now about low prices is a ruse.

Microeconomic theory postulates two broad periods in the operations of firms: the short run and the long run. In the short run, the theory says some costs are fixed while others are variable, but in the long run, the theory says that all costs are variable. We may have suddenly found ourselves in that situation, when all costs are changing, some actually daily. There are no more fixed costs! That is why the price you paid yesterday for a product might not be applicable today. Even when firms evaluate their fixed assets today, they will use figures reflecting higher replacement costs because the supplier they will go to is sure to raise his prices.

This theory also postulates that in the period of variable (in our case, rising) costs, there will be free entry and exit by firms. Is there any raw material today that its price has not jumped in the past month or two? Or even three months? Rents have risen; costs of raw materials, both local and imported have risen. Indeed, costs are rising across sectors and industries. And all these are eating consumers’ welfare as producers pass on the rising costs.

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What this means for Nigeria in the current milieu is that some producers may choose to shut down rather than continue in operation if they cannot recover their costs. Such a decision will be hastened by any attempt by the government to control the prices at which producers can sell their products if no efforts are made to reduce their operating costs.

Costs do not originate from the skies. They are products of the environments in which companies operate, both local and international. You cannot devalue your currency, triple the price of petrol, and turn around to ask why food prices are rising. To address the challenge posed by rising costs, agencies of government must analyse the operating environment and determine the extent to which the cost structure has changed. This is not the time for arm-chair policy formulation.

For instance, the National Bureau of Statistics announced yesterday (Tuesday) that the price of petrol rose in June by 210 per cent following the subsidy removal, compared to the price in June 2022. In other words, the price of petrol more than tripled in one year, and we know it has risen further since then. This has affected every aspect of our national life since then. Therefore, it is clear then that the multiplier effects of this singular event have been quite significant.

What companies and individuals are doing now is just a rational response to the changed cost structures facing them. Even if an operator’s costs have not changed so drastically now (which is quite unlikely), what is the assurance that they will not change tomorrow? And if the prices of the goods and services that an individual consumes have risen, why should the price of his goods remain static, when he is already facing higher costs? These are some of the factors driving the current cost spiral.

The rising costs will realign economic activities in favour of services. The consequences could include a decline in the output of goods, from agricultural produce to industrial production. There could also be a resurgence in criminal activities as earnings fall below daily needs.

Labour costs have risen and are still rising because the daily wage rates can no longer feed the workers and their families. From the clearing of the bush for farming to tilling the ground and planting or harvesting, the few labourers remaining in the villages are demanding higher daily wage rates. This is quite understandable because they too are facing higher prices for their daily needs.

To clear a plot of land for farm work used to cost about N2,000 in some places about two years ago; now it is up to N3,000. The daily wage rate for such workers has risen to this amount, plus a demand for the workers that their principal must cook a good meal for them.

In the oil palm industry, smallholder farmers are facing challenges posed by increasing labour costs. Harvesters now charge as much as N3,000 to N4,000 per day in some places. Those who help to carry the palm bunches from the various points on the farm to a central point for evacuation, as well as those whose job is to pick the loose palm fruits that fall during harvesting, now charge at least N3,000 per day.  A few months ago, the daily rates were about half of these amounts. But this is not the end of the increase, going by the statements from these farm labourers.

The truth is that in the current scenario, there is hardly anyone that could be singled out as the cause of the price hike going on. And that means that you could hardly blame anyone for raising their prices. Everybody is raising their price. This is understandable because, as far as business is concerned, nobody is in it as a benefactor.  No producer wants to absorb costs beyond what is permissible or feasible without hurting his bottom line. And this is a critical aspect of the price increases being experienced in the economy.

The government has declared an emergency on the prices of food items. But will miss the purpose if it does not first address the fundamental issues relating to the causes of food price increases. For a long time, food inflation has been the key driver of the nation’s galloping inflation rate. And that is not good for the low-income groups, who by definition spend a higher proportion of their incomes on food. Right now many such families are going hungry because the entire income is not enough to put food on the table.

The solution is not in controlling prices of food items, but in taking actions that will reduce the prices of the products. From insecurity to rising input and transportation costs, the farmer faces higher production costs and these have to be recouped for his or her operations to be sustained.

In all of these, this economy needs policies that will boost production, not suppress it. The road to falling or low prices lies in higher productivity and increased output, not in controlling the prices of goods produced in a high-cost environment.