Naira among Africa’s weakest currencies, plummets by 40% — W’Bank

By Sodiq Adelakun

Naira has been unequivocally identified as one of the most underperforming currencies in the vast continent of Africa, as astutely highlighted in a recent report by the esteemed World Bank titled “Africa’s Pulse: An analysis of issues shaping Africa’s economic future.”

The report highlights that the currency has experienced a significant decline of approximately 40 percent against the US dollar since a devaluation in mid-June. This depreciation has raised concerns about the economic stability of Nigeria and its impact on the country’s future.

“So far this year, the Nigerian naira and the Angolan kwanza are among the worst-performing currencies in the region: these currencies have posted a year-to-date depreciation of nearly 40 percent.

“Other currencies with significant losses so far in 2023 are those of South Sudan (33 percent), Burundi (27 percent), the Democratic Republic of Congo (18 percent), Kenya (16 percent), Zambia (12 percent), Ghana (12 percent), and Rwanda (11 percent),” the report said.

These losses are attributed to various factors, including uncoordinated policy interventions and foreign exchange controls, which have also contributed to inflation in some Sub-Saharan African countries, such as Ethiopia, Nigeria, and Zimbabwe.

The report noted that Inflation in most Sub-Saharan African countries has been increasing since 2022, it said, “However, controlling inflation is still difficult for central banks in the region, especially in countries with underdeveloped financial systems, large informal sectors, and poor fiscal-monetary policy coordination.”

For countries where inflation is close to or within the central bank’s target range (such as South Africa, Kenya, and Uganda), it is important to fine-tune monetary policy to control inflation without causing hardship or job losses.

The bank advised that countries with high double-digit inflation rates or inflation that has not yet peaked such as Ethiopia, Ghana, and Nigeria, should avoid unorthodox interventions that could make their monetary policies ineffective, such as monetising the budget deficit, direct lending interventions, untargeted subsidy programs, or foreign exchange controls.

“If monetary and fiscal policies are not coordinated to bring down inflation, there is a risk that inflation expectations will become unanchored, leading to further inflation, higher interest rates, and a slowdown in economic activity.”

For these countries, an independent central bank with a clear mandate, transparent decision-making, and accountable authorities are essential to curbing inflation. Fiscal policies should be coordinated with monetary measures to achieve inflation targets and ensure the sustainability of public finances.

Regarding current account deficits, the report projects a narrowing of the median regional current account deficit in Sub-Saharan Africa, with oil-exporting countries expected to maintain a surplus despite softer energy prices.

Nigeria’s current account is expected to improve in 2023 due to reduced imports and increased domestic refining capacity, despite lower oil earnings.

“The current account surplus of these countries is set to narrow even further to one percent in 2025, reflecting a likely drop in forecast energy prices,” it said.

“Oil-exporting countries are expected to have a current account surplus of 2.2 in 2023. This is because energy prices are still above pre-pandemic levels, and oil output is expected to be lower due to capacity issues and lower investments in some countries such as Angola, Equatorial Guinea, and Nigeria, among others,” the report said.

According to a recent report, Nigeria’s current account is predicted to see a slight improvement, increasing from 0.2 percent of GDP in 2022 to 0.6 percent of GDP in 2023.

This positive trend is expected despite a decrease in revenue from oil sales.The report attributes this improvement to two main factors.

Firstly, the devaluation of the naira has made imports more expensive, leading to a reduction in the importation of goods and services. Secondly, Nigeria’s domestic refining capacity has received a boost, resulting in a decreased need for oil imports.

Although oil production is projected to recover in 2024-25, it is expected to remain below the OPEC+ quota. However, the report anticipates a decline in fuel product imports as a new refinery increases its production.

The financial institution also highlighted the growth prospects for the Sub-Saharan region, excluding major countries like Angola, Nigeria, and South Africa.

It projected a growth rate of 3.1 percent in 2023, which is set to expand to 4.7 percent and 5.2 percent in 2024 and 2025, respectively.

However, the economic performance of the Western and Central Africa Subregion, known as AFW, will be hindered by Nigeria’s underperformance in 2024-25, with growth rates expected to be lower than the subregional average.

The Nigerian economy itself is expected to grow from 2.9 percent in 2023 to an average rate of 3.7 percent in 2024-25.

However, this growth rate is insufficient to alleviate extreme poverty in the country. The growth will be driven by sectors such as services, trade, construction, manufacturing, and agriculture.