Nigeria, the biggest economy in Africa, is currently grappling with a severe economic downturn. Issues such as a bodged currency redesign, the elimination of fuel subsidies, and the decision to float the country’s currency have led to a sharp rise in inflation and a currency collapse, causing widespread privation repercussions throughout the country. The Central Bank of Nigeria (CBN) made a daring decision on October 26, 2022, revealing a new look for the country’s top currency notes (₦200, ₦500, and ₦1000) and declaring that the old notes would no longer hold legal tender value after January 31.
The initiative was supposed to reduce counterfeiting, promote electronic transactions, and minimize election fraud. However, despite good intentions, the implementation resulted in chaos and unexpected consequences. President Bola Tinubu, in his inaugural address in May 2023, announced the removal of subsidies. Shortly after, he also declared the rescinding of the currency redesign strategy and unveiled intentions to allow the Nigerian naira to float on the international exchange market. Other economic factors surrounding Tinubu’s assumption of office consisted of substantial foreign debt, diminishing foreign reserves, and challenges in the global economy.
Increasing fuel prices poses a significant challenge.
Tinubu’s early announcement of the fuel subsidy removal initially triggered a wave of mixed reactions and thrills among Nigerians, as well as international organizations such as the International Monetary Fund and the World Bank who had been pushing for this change. However, the impact of the decision quickly became apparent as negative consequences started to emerge. Within a subsequent short period, the cost of Premium Motor Spirit (PMS), previously sold at ₦189 per litre, skyrocketed by 196% to ₦557 per litre. Moreover, the issue of increasing fuel prices poses a significant challenge as it leads to a domino effect of rising costs across various sectors.
Industries such as manufacturing and agriculture heavily depend on fuel to operate machinery and equipment, especially in the absence of reliable grid electricity throughout the country. This price hike has had a profound impact on numerous households in Nigeria. However, the proceeds from the removal of the fuel subsidy is seen as a chance to redirect funds towards enhancing education, healthcare, and overall well-being of the population, aligning with the electoral promises made. On June 14, 2023, the Tinubu administration made the decision to lift the peg of the naira against the US dollar.
Naira plummeted in value by a significant 25% within a day.
This decision allowed the naira to fluctuate freely in the market and determine its actual value based on the forces of supply and demand. The aim was to combat corruption and minimize opportunities for arbitrage caused by the gap between official and black market exchange rates. Unfortunately, it proved to be a policy change that pushed the limits too far. Within a day, the naira plummeted in value by a significant 25%, causing a series of negative repercussions that are now dangerously pushing the country towards a critical point. Recall that Tinubu mentioned in his campaign speech that the policies he plans to put in place may be difficult at first but will ultimately lead to positive outcomes in the long run.
Also, Nigeria’s heavy dependence on imported products has greatly contributed to the inflation problem, causing inflation to soar to nearly 30%, with food inflation leading the charge at 35.4%. The cost of imports has risen significantly, leaving Nigerians with dwindling purchasing power. Workers salary in Nigeria remain stagnant, with the minimum wage set at ₦33,000 per month. Businesses are also struggling to obtain the foreign currency needed to import goods. In response to the crisis, the Central Bank of Nigeria is taking action to address the issue by raising interest rates to 22.75% from 18.75% and is selling US dollars through auctions.
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There are early indications of recovery in the currency, as shown by the naira gaining value of 6.89% appreciation following a rise in interest rates. However, the journey ahead will be difficult and lengthy. Implementing these tactics can have drawbacks – increasing interest rates may hinder fragile economic growth and intervening in currency markets may further deplete already limited foreign reserves. Should the ongoing cost of living crisis persist, there is a high probability of civil unrest, as evidenced by the increasing number of organizations and individuals participating in protests against the worsening economic conditions.
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