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 identified the Nigerian naira as one of the worst-performing currencies in Africa, with a staggering depreciation of nearly 40% against the US dollar since a mid-June devaluation.
The report attributes the weakening of the naira to the central bank’s decision to remove trading restrictions on the official market, causing a significant ripple effect in the country’s financial landscape. The Angolan kwanza also shares the spotlight with the naira, with both currencies posting a year-to-date depreciation of nearly 40%.
The World Bank points out that other African currencies experiencing substantial losses in 2023 include South Sudan (33%), Burundi (27%), the Democratic Republic of Congo (18%), Kenya (16%), Zambia (12%), Ghana (12%), and Rwanda (11%). The bank highlights the compounding inflationary problems faced by some countries in the region due to parallel exchange market rates.
The central bank’s directive in June 2023 to remove the rate cap on the naira at the official Investors and Exporters’ window and allow the free float of the naira against global currencies has led to a significant decline in its value, falling from N473.83/$ to around N800/$ officially.
The report underscores the widening gap between the parallel and official exchange rates of the naira, which persisted from March 2020 until June 2023. The unification and liberalisation of the exchange rates in June allowed the NAFEX rate to converge with the parallel one, momentarily closing the gap. However, the reemergence of the parallel market premium is noted, signaling persistent challenges.
Notably, the World Bank highlights the impact of recent reforms by the administration of Bola Tinubu, indicating that the purchasing power of households might suffer in the short term. The removal of fuel subsidies and the devaluation and unification of the exchange rate system, while aimed at improving fiscal and external accounts, are expected to have inflationary effects, eroding purchasing power and potentially affecting economic activity.
As the Nigerian economy faces challenges, with growth expected to decelerate from 3.3% in 2022 to 2.9% in 2023, the World Bank emphasizes the need for careful consideration of the short-term consequences of these policy measures on households and economic dynamics.