Nigeria is currently grappling with a severe currency crisis, marked by a staggering 50% depreciation of the naira against the US dollar within the past year. At the heart of this crisis lies a critical decision by the government to resort to printing more money than it had in foreign reserves, a move aimed at addressing budget deficits and settling outstanding debts. The fiscal challenges date back to 2015 when the collapse of global oil prices, a primary revenue source for Nigeria, set the stage for a prolonged economic struggle.
The government responded by accumulating significant domestic and foreign debt, pushing the public debt to over 35% of the GDP by 2020. The subsequent onslaught of the COVID-19 pandemic further strained the economy, leading to a liquidity crunch and a struggle to meet debt obligations. To avert defaulting on its debts, the government opted for the perilous path of printing more naira. The Central Bank of Nigeria (CBN) reported a startling increase in the government’s overdraft facility, soaring from 2.4 trillion naira ($6 billion) in 2019 to a staggering 10 trillion naira ($24.5 billion) in 2020, amounting to 12% of the GDP.
Hyperinflation occurred as a result of this step.
Notably, this surpassed the total amount of dollars held in the CBN’s foreign reserves, which stood at $35.4 billion by the end of 2020. The consequences were swift and profound. The naira’s overvaluation became unsustainable, prompting the CBN to maintain a fixed exchange rate of 380 naira per dollar. However, this led to a glaring disparity between the official rate and the parallel market rate, exceeding 500 naira per dollar by December 2020. In response, the CBN enforced stringent capital controls and rationed foreign exchange, resulting in a shortage of dollars and impeding both trade and investment.
Then, the excessive supply of naira, coupled with the scarcity of dollars, triggered a rapid depreciation of the national currency and a surge in inflation. The annual inflation rate skyrocketed from 11.4% in December 2019 to 18.1% in April 2021, reaching levels unseen since 2017. Notably, food inflation soared even higher, hitting 22.7%. This reflected the impact of currency devaluation on import costs and domestic food production, exacerbating the challenges faced by the poor and vulnerable, who allocate a substantial portion of their income to food.
Printing of excessive money must cease to address the problem.
Furthermore, the repercussions extended beyond inflation, adversely affecting economic growth and development. In 2020, the GDP contracted by 1.8%, marking the nation’s second recession in five years. The unemployment rate surged to a staggering 33.3% in the fourth quarter of 2020, a record high. Concurrently, the poverty rate climbed from 40% in 2019 to 45% in 2020, indicating that over 100 million Nigerians were living below the international poverty line of $1.90 per day.
To extricate itself from this dire situation, the Nigerian government must cease the practice of printing money and instead embrace a comprehensive fiscal and monetary policy framework. This framework should aim to restore macroeconomic stability and instill confidence in the economy. One crucial step involves reducing the fiscal deficit by augmenting revenue streams and streamlining expenditures. Concurrently, the CBN must permit the exchange rate to reflect market forces and eliminate the existing multiple exchange rate regime.
Strict monetary policies should also be put in place.
Also, a tightening of the monetary policy stance and a reduction in lending to the government are imperative to curbing inflation and fostering private sector credit. In adopting these measures, Nigeria stands a chance to avert a hyperinflationary scenario that would further impoverish its citizens and compromise its economic potential. Despite the challenges, Nigeria possesses the latent capacity to transform into a prosperous and diversified economy, provided decisive actions are taken to address the prevailing currency crisis before it spirals out of control.