Understanding Nigeria’s currency slump, and what happens next

With its oil wealth, Nigeria should be awash with foreign currency. But years of economic mismanagement have left the country with a debilitating shortage of dollars. In an attempt to fix the problem, President Bola Tinubu relaxed longstanding foreign exchange restrictions shortly after taking office in May 2023. The local naira currency, pegged for years at an artificially high level against the dollar, has since fallen 70 percent. Tinubu’s goal was to trigger an influx of foreign capital and eventually make Nigeria a more attractive investment destination. The near-term impact was to send inflation surging to a 28-year high, leading to a cost-of-living crisis that could potentially undermine stability in Africa’s most populous nation.

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What has gone wrong with Nigeria’s economy?

Despite Nigeria being among Africa’s largest oil producers, the economy has stagnated for years, its resource riches plundered by a politically connected elite. Corruption is endemic, many state institutions are dysfunctional, and armed bandits and Islamist militants roam the country’s north. About 40 percent of Nigeria’s more than 200 million people live in dire poverty, according to the World Bank, and the higher living costs have added to their ranks. Dollar shortages persist, and businesses also face constant policy uncertainty and power cuts. The government used 68 percent of the revenue it collected in the first half of 2024 to service debt, an improvement on past years but still not leaving much for anything else. Under previous management, the central bank played a highly unorthodox role, providing loans to small businesses and introducing multiple exchange rates. The system was supposed to boost dollar availability to key parts of the economy but had the opposite effect, fanning a thriving unofficial currency market that made the naira even more volatile by encouraging speculation.

What’s being done to turn things around?

Within days of taking office, Tinubu partially scrapped popular fuel subsidies that cost the government $10 billion in 2022 alone and suspended the head of the central bank. The bank’s new leadership allowed the naira to trade more freely while aggressively raising interest rates. Governor Olayemi Cardoso has increased the benchmark rate by 800 basis points to 26.75 percent since he took office in September. He’s also worked hard to pay down an overhang of outstanding agreements between the central bank and Nigerian entities to sell them dollars, which has weighed on the naira. The government has also struck a deal to sell crude oil to Dangote Petroleum Refinery in naira to alleviate pressure on the currency. The sales were being made in dollars at an annual cost of $13.5 billion a year, placing a significant drain on Nigeria’s foreign currency liquidity.

 “The near-term impact was to send inflation surging to a 28-year high, leading to a cost-of-living crisis that could potentially undermine stability in Africa’s most populous nation.”

Is it working?

It’s a mixed bag. The measures were welcomed by the International Monetary Fund and World Bank but have been very painful for ordinary Nigerians. Inflation is close to a three-decade high, largely driven by the naira depreciation and higher gasoline prices due to the removal of subsidies. The currency recovered sharply from mid-March until mid-April before falling again, and it remains weak. Analysts blame seasonal factors, as rich Nigerians buy dollars to pay for foreign holidays and school fees. For his part, Cardoso says monetary policy is gradually working and the naira is on the mend.

What are foreign investors saying?

There was growing optimism as the naira clawed back from a record low earlier this year that it would find a solid base. But that’s been challenged by the currency’s recent bout of weakness, and investors are keeping their distance while they wait for it to stabilize. Government plans for a Eurobond issue and concessional funding from multilateral lenders would improve the dollar supply picture, though there’s been more talk than action on those fronts from Nigerian officials.

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How have businesses been affected?

They’ve struggled. More than 700 manufacturing companies shut down in the first quarter of 2023 alone, according to an industry association. Drugmaker GSK Plc, consumer-goods company Procter & Gamble Co., and several other international businesses have exited the country as the currency shortages made it complicated to import goods and repatriate profits. Local business leaders have warned that the higher interest rates could stifle consumer spending and investment.

What’s the prognosis?

Tinubu’s policies, if they survive in the face of popular discontent, should ultimately be good for the economy and lead to stronger and more inclusive growth. The IMF forecasts that output will expand by about 3.1 percent this year, slightly stronger than 2023. But many Nigerians are struggling to afford even basic necessities, piling pressure on the government to show the policy changes are benefiting the wider population. Desperate crowds have looted food convoys, and the risk of growing public disorder is being taken seriously by the authorities. Recent calls for public demonstrations over the cost of living crisis—wwhich echoed protest calls in Kenya in June that turned deadly—hhave prompted Tinubu to take steps to soften the impact of food prices, even as his security forces warn they won’t tolerate violent protests.