The Nigerian naira has been identified as one of the worst-performing currencies in Africa, according to a recent report by the World Bank, which put naira at a nearly 40 percent depreciation against the US dollar since a mid-June devaluation.
The World Bank’s analysis, titled ‘Africa’s Pulse: An analysis of issues shaping Africa’s economic future (October 2023 | Volume 28),’ pointed out that the Angolan kwanza is another currency in the region facing a similar situation, with both currencies posting year-to-date depreciation of nearly 40 percent.
The depreciation of the naira was attributed to the central bank’s decision to remove trading restrictions on the official market.
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For the kwanza, it was linked to the central bank’s decision to stop defending the currency due to low oil prices and increased debt payments.
The report also noted several other African currencies that have seen significant losses in 2023, including South Sudan (33 percent), Burundi (27 percent), the Democratic Republic of Congo (18 percent), Kenya (16 percent), Zambia (12 percent), Ghana (12 percent), and Rwanda (11 percent). The World Bank emphasized that parallel exchange market rates are exacerbating inflationary challenges for some African countries.
In June 2023, the Central Bank of Nigeria directed Deposit Money Banks to allow the free float of the naira against the dollar and other global currencies at the official Investors and Exporters’ window of the foreign exchange market. Since then, the naira has depreciated from N473.83/$ to approximately N800/$ officially.
Highlighting the growing disparity between the parallel and official exchange rates of the naira, the bank mentioned that this trend had been ongoing from March 2020 until June 2023. The parallel rate premium had increased to 80 percent in November 2022 and then to about 60 percent in June 2023 as the Central Bank’s efforts to restrict foreign exchange demand faced declining FX supply from oil revenues.
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The unification and liberalization of exchange rates in June 2023 brought the NAFEX rate closer to the parallel market rate, effectively closing the gap.
“However, resistance toward the increasing pressure on the Nigerian naira coupled with limited supply of FX at the official window has led to the reemergence of the parallel market premium,” the report added.
Nigeria’s growth rate would decelerate from 3.3 per cent in 2022 to 2.9 per cent in 2023, the Washington-based bank highlighted.
It stated that the country’s oil production had remained below OPEC+ quota amid capacity issues and lower international oil prices and while non-oil economic activity, particularly industry and services still supported growth, policy actions to remove fuel subsidies and unify the exchange rates might be weighing on these activities in the short term.
The World Bank noted that activity in Nigeria’s manufacturing and services sector contracted in August. “Weak business confidence and rising input costs are driving the contraction of activity,” it said. It stresses business confidence appears to have weakened in Nigeria.
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Commenting on the recent reforms of the new administration of Bola Tinubu, the global bank disclosed that purchasing power of households was expected to suffer in the short term.
It said, “The incoming Tinubu administration implemented a series of reforms that included the removal of fuel subsidies and the devaluation and unification of the exchange rate system. Petroleum prices have more than tripled since the subsidies were lifted at the end of May.
“The naira has weakened by nearly 40 per cent against the US dollar since the mid-June devaluation. Although these measures are intended to improve the fiscal and external accounts of the nation, their inflationary effects in the near term can erode the purchasing power of households and weigh on economic activity.”
