Nigeria’s economy has been facing multi-faceted woes which are directly affecting the citizens’ livelihood. Even with Nigeria’s significant oil production capabilities, the country continues to struggle with persistent shortages of foreign exchange, hindering its economic growth. The current president, Bola Tinubu, has been actively attempting to reform the foreign exchange market and encourage investment, although progress has been slow and challenging. The decrease in value of the Nigerian naira caused inflation to rise, prompting the central bank to raise interest rates significantly, potentially hampering business operations. Bloomberg reports that these actions seem to be paying off as the naira has recently gained value.
Decades of poor governance have plagued the nation, with its valuable oil resources predominantly used to enrich a select group of politically powerful individuals. Rampant corruption is widespread, numerous government agencies are ineffective, and various regions in the northern part of the country are under the control of armed criminals and extremist groups. According to the World Bank, approximately 40% of Nigeria’s population are experiencing severe poverty, with the rising cost of living contributing to this growing number. In addition to dealing with a shortage of dollars, businesses in Nigeria are faced with ongoing policy changes and frequent power outages.
Measures taken have garnered approval from the IMF.
Tinubu is focused on streamlining the exchange-rate system, enhancing manufacturing, upgrading the electricity supply, making public transportation more convenient and cost-effective, and expanding investment in road, rail, and port infrastructure. Under his directive, the central bank allowed the naira to trade with more flexibility and shift towards targeting inflation rather than controlling the money supply. In an effort to stabilize the naira and curb inflation, the central bank implemented unprecedented interest rate hikes of 400 basis points in February 2024, followed by an additional 200 basis point increase in March.
In March, the central bank announced that it had resolved a $7 billion backlog of foreign exchange requests from both industries and foreign entities. The next month, it proposed selling dollars to local bureaux de change at rates that better reflected market conditions and declared a prohibition on using dollars as collateral for naira loans, except for government Eurobonds and foreign bank guarantees. The measures taken have garnered approval from both the International Monetary Fund (IMF) and the World Bank. However, they have inflicted immense hardship on regular Nigerians as they grapple with exorbitant prices for fuel and essential food items.
Naira has been the top-performing currency globally since March.
The country is currently experiencing close to a three-decade high inflation due to the devaluation of the naira and increased fuel costs. Despite the currency losing over 60% of its value against the dollar during Tinubu’s administration, it has seen a remarkable turnaround and is now the top-performing currency globally since March. This unpredictability in the currency markets continues to worry foreign investors. A steady naira value would give them the opportunity to invest in the country’s domestic bonds, ultimately helping Tinubu’s government lessen its reliance on borrowing in foreign currencies.
Goldman Sachs Inc. analysts announced in March that the naira may be at a turning point with rate hikes and increased capital inflows. Despite this positive outlook, businesses are facing challenges. An industry association reported over 700 manufacturing companies closed in the first quarter of 2023. Local business leaders are concerned about the impact of higher interest rates on consumer spending and investment. Additionally, due to a lack of foreign currency, several multinational corporations have pulled out of the nation, facing challenges in importing goods and transferring earnings back home.
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Moreover, the IMF predicts that Tinubu’s policies will boost the economy, resulting in robust and inclusive growth with a projected annual output expansion of 3.1% until 2028. The Central Bank of Nigeria’s Governor Olayemi Cardoso, previously with Citigroup Inc., foresees a decrease in inflation for the year 2024. The Nigerian government is under increasing pressure to demonstrate that policy changes are positively impacting the population, as a significant number of Nigerians face challenges in affording essential items.
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