How to Overcome the Nigerian Foreign Exchange Rate and Inflation Problem

Nigeria is facing a serious economic challenge, as its currency, the naira, has fallen to a record low against the US dollar, and its inflation rate has surged to over 18%. This has resulted in reduced purchasing power, increased cost of living, and lower economic growth for the country. What are the causes and effects of this problem, and what are the possible solutions and strategies to overcome it?

Causes and Effects of the Problem

The foreign exchange rate and inflation problem in Nigeria has multiple and interrelated causes, such as:

Dependence on oil exports: Nigeria relies heavily on oil revenues, which account for about 90% of its foreign exchange earnings and 60% of its government revenues. However, the global oil price crash in 2020, due to the COVID-19 pandemic and the OPEC+ dispute, reduced Nigeria’s oil income and foreign reserves, making it harder to defend the naira and meet its import needs.

Multiple exchange rates: Nigeria operates a complex and opaque system of multiple exchange rates, which creates distortions, inefficiencies, and arbitrage opportunities in the foreign exchange market. The official exchange rate, which is used for government transactions and some priority sectors, is overvalued and artificially fixed by the Central Bank of Nigeria (CBN). The parallel market rate, which is used by most businesses and individuals, is determined by supply and demand and is much lower than the official rate. The gap between the two rates encourages speculation, corruption, and capital flight.

High import demand: Nigeria has a high import demand for various goods and services, such as food, fuel, machinery, and raw materials, due to its low domestic production and diversification. This creates a high demand for foreign currency, which puts pressure on the naira and depletes the foreign reserves. Moreover, the high import bill also increases the inflation rate, as the imported goods become more expensive due to the exchange rate depreciation.

• Subsidy removal: In 2023, the Nigerian government removed the subsidy on petrol, which was costing the government about $2 billion a year. The subsidy removal was meant to save public funds and encourage private investment in the downstream oil sector. However, it also led to an increase in the pump price of petrol, which in turn increased the cost of transportation and production, and consequently, the inflation rate.
• Border closure: In 2019, the Nigerian government closed its land borders with its neighboring countries, such as Benin, Niger, and Cameroon, to curb smuggling and protect its local industries. The border closure was intended to boost domestic production, especially of agricultural products, and reduce the import bill. However, it also disrupted trade and supply chains, and increased the prices of some commodities, such as rice, poultry, and tomatoes, which contributed to the inflation rate.

The foreign exchange rate and inflation problem in Nigeria has various negative effects on the economy and the society, such as:

• Reduced purchasing power: The depreciation of the naira and the increase in the inflation rate reduce the purchasing power of the consumers, especially the low-income and vulnerable groups, who spend a large proportion of their income on food and other essentials. This reduces their living standards and increases their poverty and hardship.
• Increased cost of production: The depreciation of the naira and the increase in the inflation rate increase the cost of production for the producers, especially the small and medium enterprises, who rely on imported inputs and face high interest rates and taxes. This reduces their profitability and competitiveness, and may force some of them to close down or lay off workers.
• Lower economic growth: The depreciation of the naira and the increase in the inflation rate lower the economic growth of the country, as they reduce the aggregate demand and supply, and discourage investment and savings. According to the World Bank, Nigeria’s GDP contracted by 1.8% in 2020, and is projected to grow by only 1.1% in 2021, which is below the population growth rate of 2.6%.

Solutions and Strategies to Overcome the Problem

The foreign exchange rate and inflation problem in Nigeria requires a comprehensive and coordinated approach, involving various stakeholders and policies, such as:

• Diversifying the economy: Nigeria needs to diversify its economy away from oil dependence, and develop other sectors, such as agriculture, manufacturing, services, and mining, that can generate more income and employment, and reduce the import bill. This can be achieved by improving the business environment, providing incentives and support to the private sector, and enhancing the quality and access to infrastructure, such as power, roads, and ports.
• Increasing domestic production: Nigeria needs to increase its domestic production of various goods and services, especially food and fuel, that account for a large share of its consumption and import. This can be achieved by boosting the productivity and competitiveness of the local producers, especially the farmers and the refineries, and providing them with adequate inputs, technology, finance, and market access.
• Improving fiscal and monetary policies: Nigeria needs to improve its fiscal and monetary policies to achieve macroeconomic stability and sustainability. This can be achieved by reducing the fiscal deficit and debt, increasing the revenue base and efficiency, rationalizing the expenditure and subsidy, and improving the transparency and accountability of the public finances. Moreover, this can be achieved by harmonizing the exchange rates, increasing the foreign reserves, managing the liquidity and inflation, and enhancing the independence and credibility of the CBN.
• Enhancing exchange rate management: Nigeria needs to enhance its exchange rate management to achieve a more realistic and market-based rate that reflects the fundamentals of the economy. This can be achieved by unifying the multiple exchange rates, liberalizing the foreign exchange market, eliminating the distortions and restrictions, and allowing for more flexibility and adjustment of the naira.
• Promoting trade and investment: Nigeria needs to promote trade and investment to increase its foreign exchange earnings and inflows, and improve its balance of payments. This can be achieved by improving the trade policy and facilitation, reducing the tariffs and non-tariff barriers, expanding the regional and global markets, and attracting more foreign direct and portfolio investment.
• Supporting human capital development: Nigeria needs to support human capital development to enhance the skills and capabilities of its workforce, and improve its social and human development indicators. This can be achieved by increasing the investment and quality of education, health, and social protection, and addressing the challenges of unemployment, inequality, and insecurity.

Conclusion

The foreign exchange rate and inflation problem in Nigeria is a serious and complex challenge that requires urgent and holistic action. The problem has multiple causes and effects, and affects various aspects of the economy and the society. The problem can be overcome by implementing various solutions and strategies, such as diversifying the economy, increasing domestic production, improving fiscal and monetary policies, enhancing exchange rate management, promoting trade and investment, and supporting human capital development. These solutions and strategies can help Nigeria to achieve its economic and social goals and aspirations, such as the Economic Recovery and Growth Plan (ERGP) and the Sustainable Development Goals (SDGs).