Nigerian Naira Among Africa’s Worst-Performing Currencies, Says World Bank

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 highlighted the Nigerian naira as one of the poorest-performing currencies in Africa. According to the report, the naira has weakened significantly, losing nearly 40 percent of its value against the US dollar since a mid-June devaluation.

The report underscores that, alongside the Angolan kwanza, the Nigerian naira has experienced one of the most substantial depreciations in the region this year. This depreciation was attributed to specific policy decisions by central banks.

The World Bank report elaborated on the factors contributing to the weakening of these currencies. For the naira, it was the Central Bank of Nigeria’s decision in June 2023 to remove trading restrictions on the official market, allowing the naira to float freely against the dollar and other global currencies. As a result, the naira has depreciated from N473.83/$ to approximately N800/$ officially.

Furthermore, the report notes that this situation had been brewing since March 2020, with a growing disparity between parallel and official exchange rates. The Central Bank’s attempts to limit foreign exchange demand and maintain an artificially low exchange rate were hampered by declining oil revenues. This led to a parallel rate premium of 80 percent in November 2022, which decreased to about 60 percent by June 2023.

The report also emphasized that the unification and liberalization of exchange rates in June 2023 led to the convergence of the NAFEX rate with the parallel rate, reducing the gap. However, the pressure on the Nigerian naira persisted due to limited FX supply at the official window, leading to the resurgence of the parallel market premium.

The World Bank’s analysis extended to Nigeria’s economic growth prospects, predicting a deceleration from 3.3 percent in 2022 to 2.9 percent in 2023. This decrease is attributed to factors such as below-quota oil production, challenges in the oil sector, lower international oil prices, and policy actions like the removal of fuel subsidies and exchange rate unification.

The report also highlighted that weak business confidence and rising input costs contributed to the contraction of economic activity in Nigeria. In August, both the manufacturing and services sectors experienced contractions.

Furthermore, the World Bank noted that the recent reforms initiated by the administration of Bola Tinubu, including the removal of fuel subsidies and devaluation and unification of the exchange rate system, could lead to short-term inflationary effects. These measures aimed to improve the nation’s fiscal and external accounts but could potentially erode the purchasing power of households and impact economic activity negatively.

In summary, the World Bank’s report sheds light on the challenges facing Nigeria’s economy, including a weakened currency, slowing growth, and the short-term effects of policy reforms. These findings underscore the importance of carefully managing economic policies to maintain stability and sustainable growth.