World Bank New Report Reveals Why the Naira is Struggling

In a new report titled Africa’s Pulse, the World Bank has revealed troubling news for Nigeria’s currency, the naira. According to the report, the naira is among the worst-performing currencies in Sub-Saharan Africa in 2024. 

The naira has depreciated by a staggering 43% from January to the end of August 2024. This sharp decline places the naira alongside the Ethiopian birr and the South Sudanese pound as one of the weakest currencies in the region. But what is behind the naira’s decline?

High demand for dollars

The World Bank attributes the naira’s depreciation to several key factors. One of the primary reasons is the surging demand for U.S. dollars, particularly in the parallel market. 

Financial institutions, non-financial businesses, and money managers are all rushing to buy dollars, driving up demand and putting immense pressure on the naira. This high demand for dollars has overwhelmed the currency’s value in the market.

Limited dollar inflows and slow central bank disbursements

Another major issue is the limited inflow of dollars into Nigeria. The country’s dollar earnings have slowed, making it difficult to meet the growing demand. 

On top of this, the Central Bank of Nigeria has been slow in disbursing foreign exchange to currency exchange bureaus. This has created a shortage of dollars available for trade, pushing up the price of the dollar and causing the naira to lose value.

Government reforms not enough

Nigeria’s government has tried to address the situation. In June 2023, it began liberalizing the official exchange rate, meaning that it allowed the naira’s value to be determined more by market forces rather than the government setting the rate. 

This was supposed to help stabilize the currency by making the exchange rate more realistic. However, despite these efforts, the naira continues to struggle, with the reforms falling short of reversing its depreciation.

The decline of the naira is not happening in isolation. It shows the economic challenges in Nigeria. The country is grappling with limited foreign currency reserves, meaning there’s not enough foreign money available to support the naira. Additionally, Nigeria continues to face high inflation. 

Prices of goods and services, especially imported items, are rising due to the weak naira. This has made life harder for Nigerian consumers, who are now paying more for everyday necessities.

Currency Comparison: Other African economies recovering

Interestingly, while the naira has been struggling, other African currencies have started to recover from similar challenges. For example, the Kenyan shilling and the South African rand, both of which were weak in 2023, have shown signs of improvement. 

The Kenyan shilling, in particular, has strengthened by 21% this year, making it one of the top-performing currencies in the region. This highlights how different African countries are navigating currency issues, with some faring better than others.

There has been a small glimmer of hope for the naira recently. On Monday, October 14, 2024, the naira appreciated by 5.69% against the U.S. dollar, improving from N1,641.27/$1 on Friday to N1,552.92/$1. 

However, this was accompanied by a sharp drop in foreign exchange turnover, which fell by 44.27%. This means that while the naira’s value went up slightly, fewer dollars were traded during that time, signaling ongoing instability in the currency market.

Looking ahead, the World Bank offers a mixed outlook for Nigeria’s economy. It projects that Nigeria’s Gross Domestic Product (GDP) will grow by 3.3% in 2024, with a slight improvement to 3.6% between 2025 and 2026. 

The bank also pointed out that inflation, which peaked at 34.2% in June 2024, has started to decline, reaching 32.2% in August. However, a recent hike in gasoline prices could reverse this trend, potentially driving inflation back up in the coming months. Gasoline prices have surged by 40-45% in September 2024, increasing transportation costs and further squeezing Nigerian businesses and consumers.