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. The report highlights that the Naira has experienced a significant depreciation of nearly 40 percent against the US dollar since a mid-June devaluation.
The depreciation of the Naira can be attributed to the central bank’s decision to remove trading restrictions on the official market. This move resulted in a free float of the Naira against the dollar and other global currencies. As a result, the Naira’s official exchange rate fell from N473.83/$ to approximately N800/$.
The World Bank’s report also notes that the Angolan Kwanza, another African currency, has experienced a similar depreciation trend due to the central bank’s decision to stop defending the currency amid low oil prices and increased debt payments.
Several other African currencies have also faced significant losses in 2023, according to the World Bank. These include the South Sudanese Pound (33 percent), Burundian Franc (27 percent), Congolese Franc (18 percent), Kenyan Shilling (16 percent), Zambian Kwacha (12 percent), Ghanaian Cedi (12 percent), and Rwandan Franc (11 percent). The report highlights that parallel exchange market rates are exacerbating inflationary challenges in some African countries.
Furthermore, the World Bank emphasizes the widening gap between the parallel and official exchange rates of the Naira, which had persisted from March 2020 until June 2023. The report states that the parallel rate premium had increased to 80 percent in November 2022 and then decreased to about 60 percent in June 2023 after the unification and liberalization of exchange rates. However, due to limited foreign exchange supply at the official window and resistance to currency pressure, a parallel market premium has reemerged.
The report also predicts a deceleration in Nigeria’s growth rate, from 3.3 percent in 2022 to 2.9 percent in 2023. Factors contributing to this slowdown include Nigeria’s oil production remaining below OPEC+ quotas due to capacity constraints and lower international oil prices. Additionally, the removal of fuel subsidies and the unification of exchange rates have had short-term effects on non-oil economic activities, such as manufacturing and services.
Weak business confidence and rising input costs have led to contractions in Nigeria’s manufacturing and services sector, as noted in the report. The World Bank highlights that business confidence appears to have weakened in the country.
Regarding recent reforms implemented by the new administration of Bola Tinubu, the World Bank expects the purchasing power of households to be negatively affected in the short term. The removal of fuel subsidies and the devaluation and unification of the exchange rate system have caused petroleum prices to more than triple since the subsidies were lifted at the end of May. The Naira has also weakened significantly against the US dollar since the mid-June devaluation. While these measures aim to improve Nigeria’s fiscal and external accounts, their inflationary effects in the near term could erode household purchasing power and impact economic activity, according to the report.