At the beginning of 2022, I made a business trip to Lagos, the economic capital of Nigeria. During my stay, the exchange rate was around 400-410 Naira for every 1 USD.
Where did the Naira end up today? The black market conversion rate for USD, which is rarely available in banks, reached 1250 Naira. All commercial transactions in the country have been disrupted for a while and unfortunately, inflation is seriously making itself felt to the public. What caused Nigeria, the primary country among the most advanced nations in the sub-Saharan region, to experience this economic deadlock in the present economic state?
Despite implementing aggressive monetary policies, such as a total interest rate hike of 725 basis points since May 2022, inflationary pressure continues to persist due to blocked transmission channels and ongoing monetisation of fiscal deficit. In the first five months of 2023, Nigeria experienced a 63 percent increase in federal fiscal deficit, mainly due to mounting interest payments, pre-election capital outlays, and persistent fuel subsidy expenditure. Inevitably, this challenging predicament in Nigeria will eventually result in a positive resolution. Experts and markets estimate that it will experience an average growth rate of 3.4 percent between 2024 and 2025, depending on the reduction of this economic bottleneck and the continuation of macro-financial reforms. Inflation is expected to decrease this year and the current economic difficulties will somewhat ease.
Nigeria ranks the 10th largest oil producer in the world but the real challenge is converting the intis wealth into profitable investments. The even worse part is that although Nigeria has 2.3% of the world’s oil reserves, it imports oil and still often experiences oil shortages in the country. Sadly, this has a significantly negative influence on trade in the fields of export and import.
Let’s go back a little to 1980. At that time, the Nigerian economy had the wind at its back and was running towards its growth targets, while the exchange rate for 1 USD was 0.80 Naira. During that time and in the years that followed, the Nigerian industry underwent significant changes. While it was once a net exporter of oil, it has now shifted to being a net importer.
In response to the oil boom of the 1970s, the federal government teamed up with foreign car manufacturers to establish a partnership focused on constructing vehicles and providing technical expertise, ultimately strengthening the local industry. By the late 1970s and early 1980s, foreign brands had a stronghold on the sector, relying on imported components and fully built parts. The gradual increase in used foreign cars had a significant impact on the integration of the country’s domestic automobile sector by 2000. A recession was triggered in the local automotive market from this point on. The production of cars is a prime example of a heavy industry, demanding substantial investments in human resources and capital. Any reduction in this sector could have detrimental effects on the country’s financial stability. Along with the production of vehicles, there exists a sub-industry of automotive parts suppliers that offer a range of products to factories including steering wheels, seats, engine parts, plastic components, and lighting. The idea of an automotive production industrial facility as a single factory is incomplete; the accompanying sub-industry is a vital aspect of this chain. Consequently, disrupting the production of local vehicles results in a decrease not just in one industry, but in multiple industries that contribute to it.
Beyond just automotive products, the country was also capable of producing a multitude of technological devices during that period. Sanyo, the popular television and radio brand of that era, was being made in their Ibadan, Nigeria facilities, as a case in point.
From sewing essentials to household necessities like cotton fabrics and refrigerators, the country has the capability to produce a variety of goods domestically. The decrease in local production and shift towards imports caused a decrease in the supply of goods in the domestic market, leading to a partial decrease in exports and dealing a blow to employment. As a consequence, there is a current presence of economic bottlenecks. Ultimately, these economic fluctuations caused significant harm to numerous businesses and severely impacted the purchasing ability of the community.
What are the potential solutions to alleviate these economic issues?
Implement reliable economic policies: The government’s main objective should be to ensure a stable and predictable monetary policy framework. The appropriate level of interest rates is crucial in fostering investment while reducing the risk of currency volatility caused by excessive speculation.
Strengthen foreign exchange funds: It is imperative to establish and sustain a satisfactory amount of foreign exchange reserves in order to uphold the value of the Naira. The government’s top priority should be policies that attract foreign investments and stimulate exports, resulting in a growth of foreign currency inflow.
Support the expansion of export diversity: The Naira’s susceptibility to changes in global oil prices is due to its heavy dependence on oil exports. The government should prioritize the development of non-oil sectors, such as agriculture, manufacturing, and services, to diversify the country’s export base.
Keeping Inflation in Check: The currency’s value can be diminished by high inflation over a period of time. To prevent this, it is important for the government to adopt sensible fiscal measures, such as careful spending and suitable taxation.
Promote the success of domestic enterprises: Stimulating local production and decreasing dependence on imports can result in a reduction of foreign currency demand. To promote industries, the government should consider offering incentives, enhancing infrastructure, and implementing capacity-building strategies. The Naira would experience less pressure and economic growth would be stimulated.
Increasing investor reliability: Establishing a dialogue with both local and foreign investors to address their worries and facilitate a conducive business environment is critical. In order to attract more foreign investments and strengthen the Naira, the government should concentrate on improving governance, ensuring the rule of law, and addressing security challenges.
Maintaining the Naira’s progress against the Dollar is a difficult task that requires a thorough strategy. These proposals are a good beginning, but it’s crucial to consistently monitor, evaluate, and make changes as needed in light of the evolving economic conditions.
