Nigeria struggles to halt escalating currency crisis and growing food insecurity | Private Equity Weekly

Nigeria is struggling to contain a historic currency crisis and soaring inflation, with the International Monetary Fund warning on Monday that nearly one in 10 people face food insecurity.

Soaring food prices have triggered a cost-of-living crisis in Africa’s largest economy, with inflation reaching 29.9% in January.Meanwhile, the naira currency, At the end of February, it fell to a historical low of around 1,600 against the US dollar.

The government of President Bola Tinubu came to power in May 2023, inheriting a highly unstable economic situation characterized by sluggish growth, rising inflation, low tax revenues and import-export imbalances accumulated over the years.

His government quickly initiated a series of economic reforms aimed at liberalizing the economy, such as eliminating fuel subsidies and loosening currency controls.

Although welcomed by foreign investors, the short-term impact is the unraveling of various macroeconomic problems artificially contained by interventionist policies.

IMF staff completed a mission to Nigeria in February and noted on Monday that while economic growth would reach 2.8% in 2023, it would be slightly below the level needed to support the country’s rapid population growth.

“Higher oil production and an expected improvement in harvests in the second half of the year will be positive for GDP growth in 2024, which is expected to reach 3.2%, although high inflation, a weak naira and policy tightening will pose headwinds,” the Washington, D.C. report said in its report. reported on the country.

“About 8% of Nigerians consider themselves food insecure and addressing the growing problem of food insecurity is a top priority.”

However, the IMF welcomed Nigeria’s approval of an “effective and well-targeted social protection system” and governmental Grains, seeds and chemical fertilizers were released and dry season agriculture was introduced.

IMF praises government and central bank efforts

Mission staff noted that recent improvements in government tax revenue and oil production were “encouraging” and that the Central Bank of Nigeria recently decided to raise interest rates by 400 basis points to 22.75% to curb inflation and ease pressure on the naira.this have That triggered a slight strengthening in the currency in recent days.

David Omojomolo, Africa economist at Capital Economics, said: “The interest rate announcement was cautiously welcomed by investors, with the naira gaining against the dollar in official and parallel markets. “

“The positive reaction was largely due to the size of the rate hike, which surprised the consensus (but not ourselves). A renewed commitment to the inflation targeting framework also helped.”

However, he said there was something concerning about a subsequent speech by CBN Governor Olemi Cardoso, who seemed worried about government policies.

“He deftly blamed some of the inflation problems on ‘non-monetary factors,’ including ongoing infrastructure and insecurity issues,” Omojomolo said in a note on Friday.

“He also blamed loose fiscal policy – Mr Cardoso may have argued that the government’s decision to return to providing cash transfers to households did not help the central bank in its fight against inflation.”

Omojomolo said the central bank’s strategy to stabilize the naira was also unconvincing.

“Raising interest rates will help attract dollars through foreign investment, but (Cardozo) and the government’s focus on so-called foreign exchange speculation shows that the authorities remain unwilling to let the naira change with market forces,” he added.

“Failing to resist these interventionist tendencies risks the emergence of new macro imbalances that have been at the heart of recent currency and inflationary crises and the need to keep monetary policy tight for longer at the expense of economic growth.”

Private sector momentum slows

Data last week showed that Nigeria’s private sector momentum slowed in February, with the Stanbic IBTC Bank PMI (purchasing managers index) falling to 51.0 from 54.5 in January.

Any reading above 50 indicates economic expansion, and Nigeria’s PMI has remained in positive territory for the past three months. However, the full-year average dropped from 53.9 in 2022 to 50.4 in 2023.

Peter Scribant, senior political economist for Africa at Oxford Economics, said high input prices and output cost inflation are suppressing private sector confidence and business activity.

“Disruptions to the non-oil economy, currency volatility, surging inflation, rising fuel and transport costs, and food shortages will remain issues throughout 2024, while increasing price pressures, policy uncertainty, and weak consumer spending will dampen the economy. activity and growth,” Scribante said in a research note on Monday.

Oxford Economics predicts real GDP growth of 2.8% in 2024 as improvements in the hydrocarbon industry offset weakness in the non-oil economy.

Scribant added: “Domestic industrial recovery, increased foreign investment and slowing inflation are all upside risks this year.”

“In contrast, downside risk factors include price stickiness, currency weakness, oil price volatility and domestic insecurity.”