Ibadan, Nigeria – February 19, 2024: Demonstrators are seen protesting against rising prices and harsh living conditions in Ibadan on February 19, 2024.
Samuel Alabi | AFP | Getty Images
President Bola Tinubu announced on Tuesday that the federal government plans to raise at least $10 billion to increase foreign exchange liquidity and stabilize the naira, according to multiple local media reports.
The currency has depreciated by about 70% since Tinubu took office in May 2023, inheriting a struggling economy and promising a number of reforms aimed at steadying the ship.
To revive the struggling economy and attract international investment, Tinubu unified Nigeria’s exchange rates and Allowed market forces to set exchange rates, causing a currency collapse. In January, the market regulator The way currency closing rates are calculated has also changedwhich resulted in further de facto devaluation.
Years of foreign exchange controls have also pent-up huge demand for the US dollar as foreign investment and oil exports decline.
Ibadan, Nigeria – February 19, 2024: Demonstrators hold placards protesting against rising prices and harsh living conditions in Ibadan on February 19, 2024.
Samuel Alabi | AFP | Getty Images
“The exchange rate depreciation will lead to higher imported inflation, further increasing price pressures in Nigeria,” Peter Scribante, senior political economist at Oxford Economics, said in a note on Friday.
The country is Africa’s largest economy and has a population of more than 210 million people, but it relies heavily on imports to meet the needs of its rapidly growing population.
“Lower disposable incomes and worsening cost of living pressures will remain a concern through 2024, further constraining consumer spending and private sector growth,” Scribante added.
Meanwhile, the inflation rate continues to rise, with the Composite Consumer Price Index in January rising 29.9% year-on-year, the highest level since 1996. The increase was driven by sustained increases in food prices, which soared 35.4% last month. compared to last year.
Rising costs of living and economic hardship sparked protests across the country over the weekend. The sharp drop in the currency was compounded by the negative effects of government reforms, including the abolition of gas subsidies that tripled gas prices.
President Tinubu said in late July that the government had already saved more than 1 trillion naira ($666.4 million) by eliminating subsidies, which would be redirected to infrastructure investment.
LAGOS, NIGERIA – SEPTEMBER 25, 2023: Street currency dealer in a market in Lagos, Nigeria.
Bloomberg | Bloomberg | Getty Images
In addition to soaring inflation and a plunging currency, Nigeria is also grappling with record levels of government debt, high unemployment, power shortages and declining production of oil, its main export. These economic pressures are exacerbated by violence and insecurity in many rural areas.
“Excess market liquidity, currency pressures, and food and fuel shortages threaten price stability, while inflation risks are spiraling out of government control,” added Scribante of Oxford Economics.
“Strong import demand may force the Central Bank of Nigeria (CBN) to reimpose import bans and exchange restrictions to ease the burden on the balance of payments. This will further exacerbate domestic product shortages. “Inflation could rise further.”
According to Oxford Economics, inflation is expected to peak at nearly 33% year-on-year in the second quarter of 2024, and given the significant economic risks ahead, inflation is likely to remain high for an extended period. There is.
“Furthermore, rising inflation and the CBN’s growing hawkish leanings indicate that policy rates may be raised this quarter,” Sukrivante said. The policy interest rate is currently 18.75%.
“We expect a total rate hike of 200 basis points at the next two MPC meetings scheduled for the end of February and the end of March this year, but we believe further rate hikes are necessary to stem the rise in inflation,” Scrivante said. “There is,” he added.
Jason Tubey, deputy chief emerging markets economist at Capital Economics, expects the CBN to opt for a bigger interest rate bazooka when policymakers meet on February 26 and 27.
“This meeting will be an important test of whether the policy shift under President Tinubu is truly regaining momentum,” Tuby said in a memo on Thursday.
“We expect the MPC to try to restore some of its anti-inflation credibility by introducing a significant interest rate of 400bp, or 22.75%.”