Nigeria is struggling to stem a spiraling currency crisis and rising food insecurity

Nigeria is scrambling to contain a historic currency crisis and rising inflation, with the International Monetary Fund warning on Monday that nearly one in 10 people face food insecurity.

Inflation reached 29.9 percent year-on-year in January, driven by rising food prices that sparked a cost-of-living crisis in Africa's largest economy. Meanwhile, the naira fell to an all-time low of around 1,600 to the US dollar in late February.

The government of President Bula Tinubu came to power in May 2023, inheriting a very precarious economic situation, characterized by anemic growth, high inflation, low revenue collection, and an import-export imbalance that had built up over many years.

His administration quickly launched a set of economic reforms aimed at liberalizing the economy, such as eliminating fuel subsidies and easing currency controls.

Although welcomed by foreign investors, the short-term effect was a solution to various macroeconomic issues that had been artificially contained through interventionist policies.

IMF staff completed a mission to Nigeria in February and noted on Monday that although economic growth reached 2.8% in 2023, this is slightly below the level needed to support the country's rapid population growth.

“Improved oil production and better harvest expected in the second half of the year are positive for 2024 GDP growth, which is expected to reach 3.2 percent, although high inflation, weak local currency and policy tightening will provide headwinds.” The organization based in its report on the country said.

“With about 8 percent of Nigerians considered food insecure, addressing rising food insecurity is the urgent political priority.”

However, the IMF welcomed Nigeria's approval of an “effective and well-targeted social protection system” coupled with the government’s release of grains, seeds and fertilizers and the introduction of dry season agriculture.

The International Monetary Fund praises the efforts of the government and the Central Bank

Mission staff cited recent improvements in government revenue collection and oil production as “encouraging,” along with the Central Bank of Nigeria’s recent decision to raise interest rates by 400 basis points to 22.75%, in an effort to contain inflation and ease pressure on the naira. . This has led to a slight strengthening of the currency in recent days.

“The interest rate announcement was welcomed cautiously by investors, with the naira gaining some strength against the dollar in the official and parallel markets,” said David Omogomolo, Africa economist at Capital Economics.

“Much of the positive feedback was thanks to the size of the rise, which surprised the consensus (but not ourselves). The recommitment to the inflation targeting framework was also helpful.”

However, he noted that there was cause for concern in the accompanying speech by CBN Governor Olayemi Cardoso, who appeared concerned about government policy.

“He accurately pinned some of the inflation problem on non-monetary factors, including persistent infrastructure and insecurity problems,” Omogomolo said in a note on Friday.

“He also pointed the finger at loose fiscal policy – ​​Mr Cardoso may feel that the government’s decision to reintroduce cash transfers to households has not helped the fight against inflation being fought by the Central Bank of Nigeria.”

According to Omogomolo, the central bank's strategy to stabilize the value of the naira is also unconvincing.

He added, “Raising interest rates will help attract dollars through foreign investment, but the focus of (Cardoso) and the government on alleged speculation in foreign exchange shows that the authorities are still reluctant to allow the naira to move with market forces.”

“Failure to resist these interventionist tendencies risks a new build-up of macroeconomic imbalances that lie at the heart of the recent currency and inflation crises and require keeping monetary policy tighter for longer at the expense of economic growth.”

Private sector momentum slows

Data last week showed that Nigeria's private sector momentum slowed in February, with the Stanbic Bank IBTC Purchasing Managers' Index (PMI) falling to 51.0 from 54.5 in January.

Any reading above 50 represents expansion, and Nigerian PMIs have remained in positive territory over the past three months. However, the full-year average fell from 53.9 in 2022 to 50.4 in 2023.

Peter Scripanti, chief political economist at Oxford Economics Africa, said rising input prices and inflation in production costs are stifling private sector confidence and business activity.

“Disruptions in the non-oil economy, currency fluctuations, rising inflation, rising fuel and transportation costs, and food shortages should remain issues throughout 2024, while rising price pressures, policy uncertainty, and easing consumer spending will dampen economic activity and growth.” “Scribanti said in a research note on Monday.

Oxford Economics expects real GDP to grow by 2.8% in 2024 as improvements in the hydrocarbon sector offset weakness in the non-oil economy.

“This year, recovery in domestic industries, increased foreign investment, and easing inflation are upside risks,” Scribanti added.

“On the other hand, negative risk factors are price stability, exchange rate weakness, oil price volatility, and internal insecurity.”