World bank’s chief economist, Indermit Gill at a meeting with the National Economic Summit Group (NESG) on praised the current administration’s economic reforms, stating that “The naira’s real exchange rate is at its most competitive in 20 years”, presenting the steep devaluation as a “great opportunity” for the private sector to boost exports.
In May 2023, before the inauguration of the President Ahmed Tinubu administration, the naira exchanged for 465 naira per dollar (and N725 on the black or parallel market). The naira has since lost about 70% of its value since the president’s inauguration and the initiation of measures to liberalise Nigeria’s foreign exchange market.
The dollar now exchanges for 1,553 per dollar. Prior to this, the Buhari administration had maintained a fixed exchange (and overvalued) rate despite reduced earnings from crude oil exports and resorted to allocating scarce dollars through a system of controls and allocation. Under this system, insiders in banks and the regime colluded to allocate overvalued dollars to themselves rather than to businesses and industries.
This worsened the forex scarcity in various ways-domestic businesses could not access forex for critical imported inputs and foreign businesses and investors held off investment in Nigeria because they could not access forex from the Central Bank of Nigeria when they needed to repatriate their capital or profits. They also anticipated a steep devaluation of the naira. Foreign airlines had about $742 million trapped in Nigeria.
Under Olayemi Cardoso, the Central Bank of Nigeria has considerably liberalised the sale of forex to businesses and individuals and settled the $7 billion in the backlog of demand for forex that had built up under the regime of forex control and allocation.
Mr. Gill stated however that “this was only the beginning Nigeria will need to stay the course (of the current economic reforms) for another 10-15 years to transform the economy.
“It is very difficult to do these things but the rewards are massive.” He concluded.
Mr Gill further pointed out that the removal of fuel subsidies and the foreign exchange rules earlier put in place to prop up the naira has been able to save Nigeria $ 15 billion.
Inflation and cost of living crisis for Nigerians
While the world bank praises the economic policies put in place by the Nigerian government, the inflation and cost of living crisis caused by these policies continually stares Nigerians in the faces.
Nigeria’s headline inflation hit 32.70% in September due to the petrol price hike, marking a sharp reversal from the two-month decline earlier witnessed.
According to the National Bureau of Statistics, consumer prices index hit 32.70% in September 2024 compared to 32.15% which it was in August 2024.
The increase in fuel prices to as high as N998 per litre in Lagos and N1,003 in northeastern states contributed to the widespread cost of living crisis prevalent across Nigeria due to its accompanying increase in transport prices.
Food inflation is not left out as it rose to 37.7% compared to 30.64% it was in September 2023.
Eggs have become inaccessible to most Nigerians, with a crate going for as high as N6,000, increase in the average prices of beer, vegetable oil, palm oil, beef, gizzard, fish, beverages, etc. has also been experienced across the board.
This inflation has contributed to a swift decline in the standard of living in Nigeria, a situation that, according to the assertion of the World Bank’s chief economist, would persist if the economy is to be rescued.
Naira Devaluation – High Interest Rates and Inflation
Despite this, however, Indermot Gill insists the Central bank must stay focused on inflation to protect low-income earners and increase the competitiveness of the economy.
“It should resist the lure of short-term capital inflows that might push up the Naira’s value too quickly and crimp up non-oil growth. it should rebuild foreign exchange reserves instead as a cushion against oil volatility.
“The second thing is to help every vulnerable household cope with still higher inflation.
The government is rolling out a large-scale targeted temporary cash transfer program that has already reached between four and five million households.” Gill concluded.
Beyond Naira Devaluation: Inflation , Fiscal Reforms and Boosting Exports
For Nigeria to take full advantage of the devaluation of its currency and boost exports, inflation must be controlled, and the exchange rate needs to stabilize. A weak currency can make Nigerian goods more competitive internationally, but only if businesses feel confident enough to invest in production. Currently, inflation remains stubbornly high, and businesses, both established ones and potential investors, are hesitant to commit to new investments due to concerns about exchange rate volatility.
The uncertainty surrounding the Naira’s stability discourages investment, particularly in industries that could expand exports and create jobs. Without a stable exchange rate, businesses face the risk of fluctuating production costs, which can erode profit margins and increase the unpredictability of their operations. Inflation further exacerbates this issue, increasing the cost of inputs and reducing consumer purchasing power, which dampens demand.
Nigeria’s reforms have been partial, lacking the fiscal consolidation needed to create a more conducive environment for economic growth. Despite the devaluation and the removal of fuel subsidies, which have increased government revenues, these gains have not translated into spending that supports productive sectors of the economy. Instead, the Nigerian government has continued to pump large amounts of money into the system, keeping the money supply high and fuelling inflation.
Central Bank Governor Olayemi Cardoso recently hinted that a portion of the monthly federal allocation to states, N1.203 trillion in September 2024, is used to buy foreign exchange. This raises concerns that much of state governments’ increased revenue is used to purchase dollars (suggesting corruption and money laundering) and substantially contributes to boosting demand for forex, thus worsening the naira’s volatility.
For Nigeria to attract the investment needed to produce both for domestic consumption and export markets, the government must not only address inflation and exchange rate instability but also ensure that fiscal policies support sustainable economic growth.
