EXPLAINER: HOW THE WAR IN UKRAINE IS AFFECTING NIGERIAN ECONOMY

The war in Ukraine which started on February 24th is affecting the Nigerian economy and Nigerians in many ways. Some are direct while others are indirect.

According to the World Bank in a recent report, the direct ways the war is affecting Nigeria’s economy are: trade disruption; and commodity (mainly food, fuel, and fertilizer) prices.

The indirect ways include: The transmission of higher commodity prices to growth; and the tightening of global financial conditions, which impact foreign financing flows into Nigeria.

Trade disruptions

The war adds to the headwinds to global recovery by further disrupting supply chains, especially those between Russia and Ukraine and the rest of the world. Nigeria is among the top-ten importers of wheat grains from Russia, which accounted for 19 percent of Nigeria’s total wheat imports in 2020. As a result of the war, there is a gap that Nigeria must seek to fill from other sources.

Commodity prices

Disruptions caused by the war are causing supply shortfalls and increases in the international prices of commodities. This includes the cost of fuel and food staples (in particular, cereals and edible oils) and fertilizers, products for which Russia and Ukraine hold a considerable share of global exports.
In addition, higher cereal prices raise animal feed prices and, consequently, poultry and meat. Higher fuel and food prices in Nigeria exacerbate pre-existing inflationary pressures, eroding purchasing power and hurting the poor.

The price movements for essential food items may be leaving some Nigerians especially worse-off and at risk of falling into—or deeper into—poverty. This is determined by the mix of goods that households consume and produce.

For example, raw wheat prices have increased dramatically since the start of the war in Ukraine, rising by 35 percent between January and March 2022. Still, raw wheat constitutes only a tiny share of what Nigerians consume, limiting the impact on welfare.

However, although price increases for wheat-derived products such as flour and bread and vegetable oil were much more modest, they threatened households’ purchasing power far more, making up a much larger share of their consumption basket. This demonstrates the interlinked nature of international and domestic markets for raw and refined products.

Shocks to purchasing power may be partially offset for those households that produce and sell goods whose prices are
increasing, especially for corn-producing households in Nigeria’s middle-belt (in states such as Niger, Plateau,
and Taraba). However, this does little to help poor and vulnerable households in Nigeria’s north, who do not produce corn but buy wheat-derived products and other staples (in states such as Jigawa, Sokoto, and Zamfara). This is particularly worrying, as many northern Nigerians’ food security was already threatened even before the current cost-of-living crisis.

The higher crude oil prices triggered by the war (33 percent increase between January and March 2022) would ordinarily be beneficial to Nigeria’s current account position and its fiscal position. However, there has been no boost on the budgetary side due to continued challenges in oil production and the burden of the petrol subsidy. As a result, we expect the fiscal deficit in 2022 to grow to 5.8 percent of GDP, up from our earlier projection of 5.3 percent.

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