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Currency Woes: The Naira’s Nadir
The Nigerian Naira has been termed as one of the “worst performing” currencies in Sub-Saharan Africa according to the latest edition of the African Pulse, a report by the World Bank.
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“By end-August 2024, the Ethiopian birr, Nigerian naira, and South Sudanese pound were among the worst performers in the region,” the report stated.
This statement highlights the extent of the currency’s devaluation relative to other currencies in Sub-Saharan Africa.
Within the last 10 months, the Nigerian Naira has devalued by over 82%. It moved from ₦896 in January to ₦1635 in mid-October.
The devaluation of the naira is an outcome of the floating exchange rate policy implemented by President Tinubu after taking office in May 2023. This policy allows the value of the naira to be determined by market forces.
The devaluation of the Naira might have a mixed effect on the broader economy. In the short term, the devalued Naira has led to increased inflation, but a proper management of the policy might lead to economic stability and growth in the long term.
According to the World Bank, the weakening of the Naira is a result of the surge in demand for U.S. dollars in the parallel market, driven by financial institutions, money managers, and nonfinancial users. This, combined with limited dollar inflows and slow foreign exchange disbursements to currency exchange bureaus by the central bank, has contributed to the currency’s decline.
In Sub-Saharan Africa, the Naira is the third most devalued currency in 2024. The most devalued currency is the Zimbabwean Dollar, followed by the Ethiopian Birr.
During this period, only 10 African countries experienced no fluctuations in the value of their currencies relative to the U.S. dollar. These countries include Somalia, Cabo Verde, Djibouti, Eritrea, Libya, Mauritania, Morocco, Mozambique, São Tomé and Príncipe, and Sierra Leone.
In contrast, Kenya’s shilling recorded the highest appreciation among the different currencies in African countries in 2024, outperforming other currencies on the continent.
The depreciating naira makes imports more expensive, further driving up inflation in a country that relies heavily on imported goods.
In the last 9 months, Nigeria has experienced one of its highest inflation rates in the last 15 years. Inflation increased by 9.4% during this period, rising from 29.9% in January 2024 to 32.7% by September 2024.
Research carried out by Dataphyte showed that a fluctuation in the exchange rate has a noticeable effect on the inflation rate, especially imported food and food inflation.
Food inflation plays a major role in driving overall inflation in Nigeria. Given the country’s reliance on imported food products, fluctuations in food prices have a direct and significant impact on the national inflation rate.
Despite the short-term challenges of the naira devaluation, it has started to produce some positive long-term benefits. The total trade surplus grew by 6.5% quarter-on-quarter, rising from ₦6,527 billion in Q1 to ₦6,945 billion in Q2 2024. This expansion reflects improved trade balances, as the devaluation has made Nigerian exports more competitive in global markets.