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Africa's largest economy is battling a currency crisis and soaring inflation

·3 mins

With inflation nearing 30% and its currency hitting an all-time low, Nigeria is facing one of its worst economic crises in years.

The latest data showed that the headline consumer price index (CPI) rose to 29.9% year-on-year in January, its highest level since 1996.

The surging cost of living and economic hardship sparked protests across the country over the weekend.

The Nigerian currency hit a new all-time low against the U.S. dollar on both the official and parallel foreign exchange markets on Monday, sliding to almost 1,600 against the greenback on the official market from around 900 at the start of the year.

The government plans to raise at least $10 billion to boost foreign exchange liquidity and stabilize the currency.

The currency is down around 70% since May 2023 when the president took office, inheriting a struggling economy and promising a raft of reforms aimed at steadying the ship.

In a bid to fix the beleaguered economy and attract international investment, the government unified Nigeria’s multiple exchange rates and enabled market forces to set the exchange rate, resulting in another de facto devaluation.

Years of foreign exchange controls have also generated enormous pent-up demand for U.S. dollars at a time when overseas investment and crude oil exports have declined.

“The weakened exchange rate should increase imported inflation, which will exacerbate price pressures in Nigeria,” a senior political economist said in a note.

The country is Africa’s largest economy and has a large population, but relies heavily on imports to meet the needs of its rapidly growing population.

“Shrinking disposable incomes and worsening cost-of-living pressures should remain concerns throughout 2024, further stifling consumer spending and private sector growth,” the economist added.

Inflation continues to soar, with the headline consumer price index hitting 29.9% year-on-year in January, its highest level since 1996.

The increase is being driven by a persistent rise in food prices which jumped by 35.4% last month compared to the year before.

The surging cost of living and economic hardship prompted protests across the country over the weekend.

Alongside soaring inflation and a plunging currency, Nigeria is also battling record levels of government debt, high unemployment, power shortages, and declining oil production.

“Excess market liquidity, exchange rate pressures, and food and fuel shortages threaten price stability, while inflation risks rising out of the government’s control,” the economist added.

Inflation is expected to peak at nearly 33% year-on-year in the second quarter of 2024, according to economists, and could stay higher for longer given the plethora of economic risks ahead.

“Furthermore, rising inflation and increased hawkishness by the central bank indicate that the policy rate could be raised this quarter,” the economist said. The policy rate currently sits at 18.75%.

“We expect a combined 200 bps in rate hikes at the next two meetings, scheduled for end-February and end-March this year; however, we think that more hikes are needed to stem rising inflation,” the economist added.

Another economist sees the central bank opting for a bigger interest rate bazooka when policymakers meet. “The meeting will be a key test of whether the policy shift is truly regaining some momentum,” the economist said in a note.

“We expect that the monetary policy committee will try to restore some of its inflation-fighting credibility by delivering a large interest rate hike,” the economist added.