World Bank: Naira currency declines by 40%, ranks among Africa’s worst

The World Bank has ranked the Nigerian naira as one of the continent’s worst performing currencies.

It pointed out that since the devaluation in the middle of June, the currency had lost almost 40% of its value against the US dollar.

As detailed in “Africa’s Pulse: An analysis of issues shaping Africa’s economic future (October 2023 | Volume 28),” a report published by the World Bank explains.

It said things like, “This year, the Nigerian naira and the Angolan kwanza are among the worst performing currencies in the region: these currencies have posted a year-to-date depreciation of nearly 40 per cent.

When the central bank lifted restrictions on trading on the official market, the naira immediately began to decline in value. The decline in oil prices and the increase in debt payments led to the central bank’s decision to stop protecting the kwanza.

According to the World Bank, the currencies of South Sudan (33%), Burundi (27%), the Democratic Republic of the Congo (18%), Kenya (16%), Zambia (12%), Ghana (12%), and Rwanda (11%) have also suffered significant losses so far in 2023. Some countries in Africa have seen their inflation rates soar because of the parallel exchange market rates.

By June 2023, the naira would be allowed to freely float against the dollar and other global currencies after the Central Bank of Nigeria ordered Deposit Money Banks to lift the rate cap on the naira at the official Investors and Exporters’ window of the foreign exchange market. The value of the naira has dropped from an official N473.83/$ to around N800/$.

The bank noted that from March 2020 through June 2023, the gap between the parallel and official naira exchange rates widened.

According to the report, the Central Bank’s interventions to limit foreign exchange demand and keep the exchange rate artificially low were met with declining FX supply from oil revenues, causing the parallel rate premium to rise to 80% in November 2022 and then to around 60% in June 2023.

It stated that the gap between the NAFEX rate and the parallel rate was closed after the unification and liberalisation of the exchange rates in June 2023.

It went on to say, “However, resistance towards the increasing pressure on the Nigerian naira coupled with limited supply of FX at the official window has led to the reemergence of the parallel market premium.”

The Washington-based bank noted that Nigeria’s growth rate would slow from 3.3% in 2022 to 2.9% in 2023.

Policy actions to remove fuel subsidies and unify the exchange rates may be weighing on these activities in the short term, and the report noted that oil production had remained below OPEC+ quota amid capacity issues and lower international oil prices. However, non-oil economic activity, particularly industry and services, still supported growth.

The manufacturing and services sectors in Nigeria saw a decrease in activity in August, according to the World Bank. “Weak business confidence and rising input costs are driving the contraction of activity,” it stated. It emphasises how it seems like business confidence in Nigeria has dropped.

In response to the new Bola Tinubu administration’s reforms, the international financial institution warned that the purchasing power of households would likely decrease in the near future.

It read, “The incoming Tinubu administration instituted a series of reforms, including the elimination of fuel subsidies and the devaluation and unification of the exchange rate system.” Since the subsidies were eliminated at the end of May, the price of petroleum has increased by a factor of more than three.

Since the devaluation in the middle of June, the value of the naira has dropped by roughly 40% against the dollar. Inflationary effects in the short run can erode the purchasing power of households and weigh on economic activity, but these measures are meant to improve the nation’s fiscal and external accounts.