Nigeria’s currency plunges to record low amid soaring inflation

Nigeria, Africa’s largest and most populous economy, is facing one of its worst economic crises in years, as its currency, the naira, has fallen to a record low against the US dollar, and inflation has surged to its highest level in decades.

The naira traded at 1,524 to $1 on Friday, reflecting a 230% loss of value in the last year. The latest government statistics released on Thursday showed the inflation rate in January rose to 29.9%, its highest since 1996, mainly driven by food and non-alcoholic beverages.

The economic situation has provoked anger and protests across the country as millions of Nigerians struggle with hardship due to government reforms, such as removing gas subsidies that resulted in gas prices tripling and the COVID-19 pandemic that disrupted economic activity and reduced oil demand.

One of the main reasons for Nigeria’s economic woes is its dependence on oil exports, which account for about 90% of its foreign exchange earnings and half of its government revenue. When the global oil prices crashed in 2014, Nigeria’s foreign reserves dwindled, and its fiscal deficit widened.

The government tried to maintain a fixed exchange rate by using its reserves to defend the naira, but this proved unsustainable and costly. The naira became overvalued, creating a massive gap between the official and parallel market rates and encouraging speculation and capital flight.

Another reason for Nigeria’s economic troubles is its lack of economic diversification and competitiveness. Despite its abundant natural and human resources, Nigeria has failed to develop its non-oil sectors, such as agriculture, manufacturing, and services, which could have boosted its productivity and growth.

Nigeria also suffers from poor infrastructure, corruption, insecurity, and policy uncertainty, which deter domestic and foreign investment. Moreover, Nigeria has a large and growing population, estimated at over 210 million, which puts pressure on its public services and social welfare.

Pedestrians shop for pepper and other food items at the Mile 12 Market in Lagos, Nigeria, Friday, Feb. 16, 2024. Nigerians are facing one of the West African nation s worst economic crises in as many years triggered by a surging inflation rate which follows monetary policies that have dipped the local currency to an all-time low against the dollar, provoking anger and protests across the country. AP

A third reason for Nigeria’s economic difficulties is its recent policy choices, which have aggravated the situation. In 2019, the government closed its land borders with its neighbours, ostensibly to curb smuggling and promote local production, but this disrupted trade and increased the cost of living.

In 2020, the government removed the fuel subsidy, which had been a significant drain on the budget, but this led to a sharp rise in fuel prices and transport costs, which fed into inflation.

Nigeria must adopt a comprehensive and coherent strategy to address its economic challenges, balancing short-term stabilization with long-term structural transformation. Some of the critical elements of such a strategy include:

• It is adopting a flexible and market-determined exchange rate regime that reflects the actual value of the naira and eliminates distortions and arbitrage opportunities.
• It implements fiscal consolidation and debt management measures that reduce the budget deficit and the debt burden and increase the fiscal space for productive and social spending.
• It is enhancing monetary policy credibility and effectiveness by ensuring the independence and transparency of the central bank and focusing on price stability and financial stability as its primary objectives.
• We are promoting economic diversification and competitiveness by investing in infrastructure, education, health, and innovation and improving the business environment and the regulatory framework.
• We are expanding the social safety net and the tax base by implementing targeted and progressive cash transfers and subsidies and broadening and simplifying the tax system.
• It strengthens regional and international cooperation and integration by reopening the borders, complying with the African Continental Free Trade Area (AfCFTA) agreement, and engaging with multilateral institutions and partners.

Nigeria has the potential to overcome its economic crisis and achieve inclusive and sustainable development, but it requires bold and decisive action from its leaders and citizens.