In a recent report titled ‘Africa’s Pulse: An analysis of issues shaping Africa’s economic future (October 2023 | Volume 28),’ the World Bank has shed light on the stark depreciation of the Nigerian currency. According to the report, the Naira has weakened by nearly 40% against the US dollar since a mid-June devaluation. This decline in value has positioned the Naira among the worst-performing currencies in Africa.
The report points out that the Naira’s depreciation was triggered by the central bank’s decision to remove trading restrictions on the official market. In a similar vein, the Angolan Kwanza has faced a similar fate due to low oil prices and increased debt payments.
Several other African currencies have also witnessed significant losses in 2023, with South Sudan, Burundi, the Democratic Republic of Congo, Kenya, Zambia, Ghana, and Rwanda all grappling with depreciating currencies. The report highlights that parallel exchange market rates are contributing to inflationary issues in some African countries.
This shift in the Naira’s value can be traced back to the Central Bank of Nigeria’s (CBN) directive to Deposit Money Banks in June, instructing them to remove the rate cap on the Naira at the official Investors and Exporters’ window of the foreign exchange market. As a result, the Naira’s official exchange rate dropped from N473.83/$ to approximately N800/$.
The report further notes that there has been a persistent gap between parallel and official exchange rates for the Naira since March 2020. Despite attempts to maintain an artificially low exchange rate, the parallel market premium surged to 80% in November 2022 and remained at around 60% in June 2023. The unification and liberalization of exchange rates in June 2023 closed the gap, but challenges in stabilizing the Naira’s value and limited foreign exchange supply at the official window led to the resurgence of the parallel market premium.
In terms of economic growth, the World Bank anticipates a slowdown in Nigeria’s growth rate, projecting a decrease from 3.3% in 2022 to 2.9% in 2023. Factors contributing to this deceleration include issues with oil production, policy actions like the removal of fuel subsidies, and the unification of exchange rates.
Despite the intention behind the reforms implemented by President Bola Tinubu’s new administration, which include the removal of fuel subsidies and exchange rate devaluation and unification, the World Bank highlights that these measures may have short-term inflationary effects. This could potentially erode the purchasing power of households and impact overall economic activity.