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EXCHANGE RATE PASS-THROUGH TO CONSUMER PRICES AND ITS DIFFERENTIAL IMPACT ON QUINTILE-BASED HOUSEHOLDS IN NIGERIA

CHAPTER ONE

INTRODUCTION

Abstract

This study analyzes how exchange rate fluctuations affect consumer prices in Nigeria and explores whether currency depreciation impacts different income groups unevenly. Drawing on household expenditure surveys and detailed price data from 2010 to 2024, the research assesses overall exchange rate pass-through effects while comparing how price changes influence consumption patterns across income quintiles, ranging from the bottom 20% to the top 20% of households. The results likely demonstrate that exchange rate depreciation causes more severe inflationary pressures for lower-income groups because they spend larger portions of their income on tradable goods and imported food. Consequently, such currency movements may exacerbate inequality and erode the real incomes of Nigeria’s poorest populations..

1.1 Background of the Study

Nigeria operates a managed floating exchange rate regime and remains highly dependent on crude oil exports, making the naira vulnerable to external shocks. Sharp depreciations occurred in 2016-2017, 2020, and again in 2023-2024 following the unification of multiple exchange rate windows by the Central Bank of Nigeria (CBN), with the naira losing over 50% of its value against the US dollar in 2023 alone and depreciating by an additional 129% in 2024 to an average of ₦1,479/USD (Central Bank of Nigeria, 2024; International Monetary Fund, 2024a; Knoema, 2024). Each episode was accompanied by persistent headline inflation exceeding 20% (and food inflation often above 30%), raising concerns about the transmission of exchange rate movements to domestic consumer prices, as evidenced by inflation surging to 31.6% in 2024 driven by naira depreciation and food supply deficits (African Development Bank, 2024; National Bureau of Statistics, 2024).

Exchange rate pass-through (ERPT) refers to the percentage change in domestic prices resulting from a 1% change in the exchange rate. In theory, a depreciation raises the naira cost of imported goods and domestically produced tradables, which subsequently feeds into the consumer price index (CPI). Empirical evidence from emerging markets shows that ERPT tends to be higher in countries with low monetary policy credibility, high import dependence, and where invoices are predominantly in foreign currency, conditions that largely characterize Nigeria, where recent threshold analyses indicate short-run pass-through to consumer prices of 0.3-0.5, rising to 0.6-0.8 over 12-18 months (Ogunleye et al., 2024; Oyadeyi, 2024).

While aggregate ERPT has received considerable attention in Nigerian literature, less is known about its distributional consequences (Ogege, 2022). Households in different income quintiles consume different baskets of goods: lower-quintile households allocate a larger share of expenditure to food and basic imported items, over 60% of budgets for the bottom 40% according to the 2019 Nigeria Living Standards Survey (NLSS), compared to less than 30% for the top quintile, whereas higher-quintile households spend relatively more on services and durable goods that are less sensitive to exchange rate changes (National Bureau of Statistics, 2020; Ogunleye et al., 2024). This variation implies that a uniform depreciation may generate unequal real income effects across the population, exacerbating poverty and inequality in a context where multidimensional poverty affects 46% of Nigerians (World Bank, 2023).

1.2 Statement of the Problem

Despite numerous studies on aggregate ERPT in Nigeria, there exists a critical knowledge gap regarding its heterogeneous impact across income groups. Existing research typically assumes a representative household and therefore cannot capture how exchange rate-induced inflation affects poverty and inequality dynamics, even as naira depreciation has been shown to widen income disparities by increasing costs for import-dependent essentials. Preliminary evidence from the 2019 Nigeria Living Standards Survey shows that the bottom 40% of households spend over 60% of their budget on food, compared to less than 30% for the top quintile. Consequently, naira depreciation is likely to be regressive, disproportionately eroding the purchasing power of the poor and potentially offsetting poverty-reduction gains from other policies, as seen in the post-2023 episode where poverty rose to 46% amid 31% inflation. Without quantifying this differential impact, policymakers lack evidence to design targeted compensatory measures during episodes of currency depreciation (Ogunleye et al., 2024; Oyadeyi, 2024; Ogege, 2022; National Bureau of Statistics, 2020; International Monetary Fund, 2024; World Bank, 2023; African Development Bank, 2024).

1.3 Objectives of the Study

The main objective is to analyze exchange rate pass-through to consumer prices and its differential impact on quintile-based households in Nigeria. Specific objectives are:

1. To estimate the degree and speed of aggregate exchange rate pass-through to headline and core CPI in Nigeria over the period 2010–2024.
2. To construct quintile-specific price indices using expenditure weights from the 2019 Nigeria Living Standards Survey (NLSS).
3. To measure and compare ERPT coefficients across the five income quintiles and assess implications for poverty and inequality indicators.

1.4 Research Questions

1. What is the magnitude and speed of exchange rate pass-through to headline and core consumer prices in Nigeria?
2. How do expenditure patterns differ across income quintiles in Nigeria, particularly with respect to tradable versus non-tradable and imported goods?
3. To what extent does exchange rate pass-through vary across quintile-specific price indices?

1.5 Significance of the Study

This research contributes to the limited but growing literature on the distributional effects of macroeconomic shocks in developing countries (Ogege, 2022). It provides evidence-based guidance for policymakers at the Central Bank of Nigeria and the Ministry of Finance, Budget and National Planning regarding the incorporation of inequality considerations into exchange rate and monetary policy frameworks, particularly amid ongoing reforms (International Monetary Fund, 2024a). Development partners and anti-poverty programs will benefit from clearer identification of vulnerable groups during depreciation episodes, enabling more efficient targeting of social protection instruments (World Bank, 2023). Academically, the study adds a Nigerian case to cross-country analyses of regressive inflation and offers a replicable methodology for other import-dependent African economies (African Development Bank, 2024).

1.6 Scope and Limitations of the Study

The study examines the period from 2010Q1 to 2024Q2, capturing multiple depreciation episodes as well as the recent exchange rate unification. It utilizes national CPI data sourced from the National Bureau of Statistics (NBS) alongside household expenditure weights derived from the 2019 NLSS (National Bureau of Statistics, 2020, 2024). The analysis focuses on urban and rural households aggregated nationally without regional or state-level disaggregation. Key limitations involve potential measurement errors in informal sector pricing, the assumption of fixed expenditure weights between survey waves, and an inability to fully account for second-round effects such as wage-price spirals due to data constraints.

1.7 Operational Definition of Terms

• Exchange Rate Pass-Through (ERPT): The elasticity of domestic consumer prices with respect to the nominal effective exchange rate (or parallel/market rate where relevant), expressed as the percentage change in prices resulting from a 1% depreciation of the naira.
• Quintile-Based Households: Households grouped according to per capita consumption expenditure into five equal-sized groups (poorest 20%, second, middle, fourth, and richest 20%).
• Quintile-Specific Price Index: A price index constructed using the expenditure shares of each income quintile as weights instead of national average weights.
• Tradable Goods: Goods that are either imported or exported or have high import content (e.g., rice, vegetable oil, textiles).
• Non-Tradable Goods: Primarily services and locally produced items with low import content (e.g., housing rent, local transportation, haircuts).
• Depreciation Episode: A sustained period where the naira loses at least 15% of its value against the US dollar within six months.

References

African Development Bank. (2024). Nigeria economic outlook. https://www.afdb.org/en/countries-west-africa-nigeria/nigeria-economic-outlook

Central Bank of Nigeria. (2024). CBN statistical bulletin, 2023 ed. Central Bank of Nigeria.

International Monetary Fund. (2024a). Nigeria: 2024 Article IV consultation—Press release; staff report. IMF Country Report No. 2024/102. https://www.elibrary.imf.org/view/journals/002/2024/102/article-A001-en.xml

Knoema. (2024). Nigeria exchange rate, 1960-2024. https://knoema.com/atlas/Nigeria/topics/Economy/Financial-Sector-Exchange-rates/Exchange-rate

National Bureau of Statistics. (2020). Nigeria Living Standards Survey (NLSS) 2018–2019. NBS.

National Bureau of Statistics. (2024). Consumer Price Index and Inflation Report March 2024. NBS. https://nigerianstat.gov.ng/elibrary/read/1241484

Ogege, S. O. (2022). Exchange rate and income distribution in Nigeria. Ilorin Journal of Economic Policy, 9(2), 47–62. https://doi.org/10.53883/ijep.v9i2.6

Ogunleye, E. K., Oyadeyi, O. O., & Akinbobola, T. O. (2024). Exchange rate pass-through on prices in Nigeria—A threshold analysis. International Journal of Financial Studies, 12(4), Article 101. https://doi.org/10.3390/ijfs12040101

Oyadeyi, O. O. (2024). The macroeconomic determinants of exchange rate volatility and the impact of currency volatility on the performance of the Nigerian economy. Foreign Trade Review. Advance online publication. https://doi.org/10.1177/00157325241295884

World Bank. (2023). Nigeria development update: Seizing the opportunity. World Bank Group.