In a recent report published by the World Bank, Nigeria’s national currency, the naira, has been labeled one of the worst-performing currencies in Africa.
The report, titled ‘Africa’s Pulse: An Analysis of issues shaping Africa’s economic future (October 2023 | Volume 28),’ reveals that the naira has weakened significantly by nearly 40 percent against the US dollar since a mid-June devaluation.
The World Bank’s report highlights that, in the current year, the Nigerian naira stands alongside the Angolan kwanza as one of the poorest-performing currencies in the region, both experiencing a year-to-date depreciation of nearly 40 percent. This devaluation, according to the report, has been driven by specific policy decisions made by the respective central banks.
For the naira, the weakening was set in motion by the Central Bank of Nigeria’s decision to remove trading restrictions on the official market, allowing the naira to float freely against the US dollar and other global currencies. This move led to a substantial depreciation, causing the naira’s exchange rate to plummet from N473.83/$ to approximately N800/$, as detailed in the report.
The report emphasizes that this depreciation had been occurring gradually since March 2020 but accelerated significantly after the central bank’s intervention measures were removed in June 2023. During this period, the gap between the parallel and official exchange rates of the naira widened considerably.
The World Bank points out that the central bank’s efforts to restrict foreign exchange demand and artificially maintain a lower exchange rate faced challenges due to declining FX supply from oil revenues. This resulted in a parallel rate premium that increased to 80 percent in November 2022 and reduced to around 60 percent by June 2023.
The unification and liberalization of exchange rates in June 2023 closed the gap between the NAFEX rate and the parallel market rate, but the parallel market premium has since reemerged due to limited FX supply at the official window.
Furthermore, the report predicts a deceleration in Nigeria’s growth rate, dropping from 3.3 percent in 2022 to 2.9 percent in 2023. Factors contributing to this decline include the country’s oil production remaining below OPEC quotas, capacity issues, lower international oil prices, and the impact of policy actions such as the removal of fuel subsidies and exchange rate unification.
The World Bank also observes a contraction in economic activity in Nigeria’s manufacturing and services sectors, citing weak business confidence and rising input costs. It attributes this contraction to the removal of fuel subsidies and the unification of the exchange rate system.
The report further notes that the purchasing power of households is expected to be negatively affected by recent reforms implemented by the administration of Bola Tinubu. These reforms include the removal of fuel subsidies and the devaluation and unification of the exchange rate system, which have caused petroleum prices to more than triple since the subsidies were lifted at the end of May.
While these measures are aimed at improving the fiscal and external accounts of the nation in the long run, the World Bank cautions that their inflationary effects in the short term may erode the purchasing power of households and impact economic activity negatively.