The Nigerian naira has been ranked among Africa’s poorest-performing currencies, with a nearly 40% depreciation against the US dollar since a mid-June devaluation, according to a report by the World Bank titled ‘Africa’s Pulse: An analysis of issues shaping Africa’s economic future (October 2023 | Volume 28).’
The report highlighted that in the same year, the Angolan kwanza also experienced a significant depreciation in the region. Both currencies recorded a year-to-date depreciation of nearly 40%.
The naira’s weakening was attributed to the central bank’s decision to remove trading restrictions on the official market, while for the kwanza, it resulted from the central bank’s decision to stop defending the currency due to low oil prices and increased debt payments.
Other African currencies that experienced substantial losses in 2023, as mentioned in the World Bank report, included South Sudan (33%), Burundi (27%), the Democratic Republic of Congo (18%), Kenya (16%), Zambia (12%), Ghana (12%), and Rwanda (11%). The report also noted that parallel exchange market rates were exacerbating inflationary challenges in some African countries.
In June 2023, the Central Bank of Nigeria directed Deposit Money Banks to remove the rate cap on the naira at the official Investors and Exporters’ window of the foreign exchange market, allowing the naira to freely float against the dollar and other global currencies. Since then, the naira’s official exchange rate has depreciated from N473.83/$ to approximately N800/$.
The World Bank report pointed out the widening gap between the parallel and official exchange rates of the naira, which persisted from March 2020 until June 2023. It stated that the parallel rate premium had risen to 80% in November 2022 and subsequently decreased to about 60% in June 2023 as the Central Bank’s interventions to restrict foreign exchange demand and maintain an artificially low exchange rate were met with declining FX supply from oil revenues.
The unification and liberalization of exchange rates in June 2023 allowed the NAFEX rate to align with the parallel market rate, closing the gap. However, the report noted that resistance to the increasing pressure on the naira, coupled with limited FX supply at the official window, led to the resurgence of the parallel market premium.
The World Bank also projected a deceleration in Nigeria’s growth rate from 3.3% in 2022 to 2.9% in 2023. It attributed this slowdown to factors such as oil production remaining below OPEC+ quotas, capacity issues, lower international oil prices, and policy actions related to the removal of fuel subsidies and exchange rate unification, which might impact non-oil economic activities in the short term.
Furthermore, the report highlighted contractions in Nigeria’s manufacturing and services sectors in August, citing weak business confidence and rising input costs as contributing factors. It emphasized a weakening of business confidence in Nigeria.
Regarding the recent reforms implemented by the new administration under Bola Tinubu, the World Bank indicated that the purchasing power of households could be adversely affected in the short term. It mentioned that while these measures aimed to improve the nation’s fiscal and external accounts, they could have inflationary effects, eroding household purchasing power and affecting economic activity.
