Two years after electing Bola Tinubu as president in February 2023, Nigerian voters have good reasons to feel traumatized by their choice. The value of the naira has collapsed, petrol prices have quadrupled following the withdrawal of motor fuel subsidies, and food prices are more than 80 per cent higher than when the election was held. Poverty, which blights the lives of more than half of the population, has risen.
Yet President Tinubu’s economic reforms give Nigeria the best hope for sustainable growth that it has had for decades. The path the reform process takes next will be crucial for the country’s future.
At the centre of the reforms has been Tinubu’s decision to allow a very substantial devaluation of the naira, which has fallen from 460 to the dollar around the 2023 election, to just below 1,500 now. Nigeria’s currency adjustment is one of the largest anywhere for years: only the Ethiopian birr has seen a bigger move recently.
Benefits of a weaker naira
In any developing economy, the most important price is the price of a dollar. If dollars are too cheap, then imports rise sharply. This can make a country financially vulnerable. More imports boost a country’s trade deficit, and deficits can become difficult to finance if global creditors lose their appetite for risk (which happens often and unpredictably). And when they do, painful bouts of financial instability can follow.
At the same time, excessively cheap dollars encourage companies and individuals to find ways of getting money out of the country, to park wealth in safer havens at low cost.
All in all, it is impossible to establish a basis for growth when capital has an incentive to leave the country.
With the naira’s fall, however, Nigeria is arguably now more competitive than at any time in the past 25 years – as illustrated by the level of the inflation-adjusted, trade-weighted exchange rate in the chart.
The Nigerian naira since 2000
Source: World Bank, Macrobond.
The depreciation of the naira has had two hugely positive consequences. One is the improvement in Nigeria’s balance of payments. The current account – the broadest measure of a country’s trade balance – is now firmly in surplus. Capital, albeit mostly in speculative form for the time being, is re-entering the country.
As a result, the Central Bank of Nigeria (CBN) has added to its foreign exchange reserves, which now exceed $40 billion. Having an adequate stock of reserves is the sine qua non for financial stability in developing countries. So the progress the CBN has made is to be congratulated. Gross reserves are at a prudent level now, more or less equal to Nigeria’s stock of external debt, but they could usefully go to higher than this.
The other positive effect is that the naira’s devaluation has given substantial support to the Nigerian budget. The World Bank argues that a misaligned exchange rate hit Nigeria’s budget harder in recent years than the cost of the government’s fuel subsidies.
That is because when the official exchange rate allows dollars to be sold for fewer naira than they are worth, the government’s revenues from oil and gas royalties, customs and excise duties, and the large part of VAT and corporate income tax that is paid in dollars, are all much lower in local-currency terms than they should be. Because of the naira’s fall – alongside the removal of petrol subsidies – Nigeria’s fiscal deficit narrowed from 6.4 per cent of GDP in early 2023 to 4.4 per cent in early 2024.
The challenge of inflation
The uglier consequence of the currency’s slide has been its effect on inflation, which ended 2024 at 35 per cent, painfully high by any standards. Although reported inflation fell sharply in January to 24.5 per cent, this was thanks to last month’s introduction of a new set of weights and a new base year for the Consumer Price Index.
Defeating inflation remains a huge immediate challenge for Nigerian policymakers – not least because the urban poor suffer the most from it. That challenge raises a central question: how to bring inflation down?
There is an easy answer to this question that should be avoided at all costs: to let the naira strengthen further against the dollar. Indeed, it has already strengthened from its late-2024 peak of just below 1,700 to the dollar. A stronger naira is tempting because as surely as its collapse pushed inflation up, a naira that gains in value would push inflation back down, as imports become cheaper in local-currency terms.
The problem with this approach is that it would accelerate the disappearance of all the gains in competitiveness that have been won through the currency’s decline. Nigeria desperately needs to attract foreign direct investment (FDI), long-term capital that helps add to the economy’s productive capacity. It is something of a tragedy that this country of 230 million people has failed to attract more than $2 billion worth of net FDI inflows annually in recent years.
A currency that stays competitive is a necessary – although by no means sufficient – condition to encourage more productive capital to enter the country. Also essential is a stable commitment to improve the business climate – everything from improving electricity supply to tackling corruption, reducing red tape and enhancing the sanctity of contract.
Resisting the temptation of a stronger naira
Instead of relying on a stronger naira, a more rapid decline in inflation would be better supported by two other strategies.