Naira Takes the Bottom Spot As Africa’s Weakest Currency

Nigerian Naira Faces Challenges: World Bank Report Highlights Currency Woes

The Nigerian Naira has found itself in a challenging position, with the World Bank labeling it as one of the worst-performing currencies in Africa. According to the World Bank’s recent report titled ‘Africa’s Pulse: An analysis of issues shaping Africa’s economic future (October 2023 | Volume 28),’ the Naira has weakened by nearly 40 percent against the US dollar since a mid-June devaluation.

The report cites the central bank’s decision to remove trading restrictions on the official market as the catalyst for the Naira’s depreciation. Similarly, the Angolan Kwanza also suffered a similar fate due to low oil prices and increased debt payments.

However, the Naira is not alone in facing currency woes in Africa. Other currencies experiencing significant losses in 2023 include South Sudan (33 percent), Burundi (27 percent), the Democratic Republic of Congo (18 percent), Kenya (16 percent), Zambia (12 percent), Ghana (12 percent), and Rwanda (11 percent). The report notes that parallel exchange market rates are further exacerbating inflationary challenges in some African countries.

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The situation for the Nigerian Naira worsened after the Central Bank of Nigeria instructed Deposit Money Banks to remove the rate cap on the Naira in the official Investors and Exporters’ window of the foreign exchange market. This move allowed the Naira to float freely against the dollar and other global currencies, resulting in a significant drop in its value from N473.83/$ to around N800/$ officially.

The World Bank also highlighted the widening gap between parallel and official exchange rates of the Naira, which persisted from March 2020 until June 2023. It stated that the parallel rate premium increased to 80 percent in November 2022 and then to about 60 percent in June 2023, as the Central Bank’s efforts to restrict foreign exchange demand and maintain an artificially low exchange rate clashed with dwindling FX supply from oil revenues. The convergence of the NAFEX rate with the parallel rate followed the unification and liberalization of exchange rates in June 2023 but has since faced challenges due to resistance and limited FX supply at the official window.

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The World Bank’s 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 include below-quota oil production, capacity issues, lower international oil prices, and policy actions such as the removal of fuel subsidies and the unification of exchange rates, which may temporarily affect non-oil economic activity, particularly in industry and services.

In addition to these economic challenges, the report notes that business confidence in Nigeria has weakened, affecting the manufacturing and services sectors, which contracted in August. The removal of fuel subsidies and exchange rate adjustments, while aimed at improving fiscal and external accounts, may have short-term inflationary effects that could impact the purchasing power of households and overall economic activity.

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