Nume Ekeghe writes the first year of the Bola Tinubu administration has been marred by hyperinflation, naira slump and mass poverty driven by bold reforms
As President Bola Tinubu marks his first year in office, one of the most significant and controversial economic policies his administration has implemented is the decision to float the naira. This move, aimed at stabilising Nigeria's economy and addressing chronic foreign exchange shortages, has had profound impacts on the country's financial landscape. While the policy was intended to promote transparency and attract foreign investment, it has also led to a dramatic depreciation of the naira, raising concerns about inflation, cost of living, and increasing poverty.
Floating the Naira
In May 2023, President Tinubu's administration announced the float of the naira, moving away from the previous fixed exchange rate system managed by the Central Bank of Nigeria (CBN). This decision was driven by a need to unify the multiple exchange rates in the country, curb the thriving black market for foreign exchange, and attract foreign investors by ensuring a more transparent and market-driven currency valuation.
Supporters of the policy argued that it would help address the distortions in the foreign exchange market and improve the allocation of scarce foreign exchange resources. By allowing the naira to find its true value, it was hoped that Nigeria could attract more foreign direct investment and boost export competitiveness.
In his inaugural speech on plans for the economy, Tinubu said: "On the economy, we target a higher gross domestic products (GDP) growth and to significantly reduce unemployment.
"We intend to accomplish this by taking the following steps: First, budgetary reform stimulating the economy without engendering inflation will be instituted. Second, industrial policy will utilize the full range of fiscal measures to promote domestic manufacturing and lessen import dependency.
"Third, electricity will become more accessible and affordable to businesses and homes alike. Power generation should nearly double and transmission and distribution networks improved. We will encourage states to develop local sources as well.
I have a message for our investors, local and foreign: our government shall review all their complaints about multiple taxation and various anti-investment inhibitions.
"We shall ensure that investors and foreign businesses repatriate their hard-earned dividends and profits home."
Furthermore, on monetary policy, he added: " Monetary policy needs a thorough housecleaning. The Central Bank must work towards a unified exchange rate. This will direct funds away from arbitrage into meaningful investment in the plant, equipment, and jobs that power the real economy. Interest rates need to be reduced to increase investment and consumer purchasing in ways that sustain the economy at a higher level. Whatever merits it had in concept, the currency swap was too harshly applied by the CBN given the number of unbanked Nigerians. The policy shall be reviewed. In the meantime, my administration will treat both currencies as legal tender."
Impact on the Naira
However, the immediate impact of floating the naira was a sharp depreciation of the currency. Before the float, the official exchange rate was around N420 to the US dollar, while the black-market rate hovered around N600. Following the policy shift, the naira quickly depreciated, with the exchange rate fluctuating wildly before stabilising at a much lower value. As of May 2024, the naira is hovering at approximately N1,500 to the US dollar at both the official Nigerian Autonomous Foreign Exchange Market (NAFEX) and the parallel market.
The depreciation of the naira has contributed to rising inflation, as the cost of imported goods and services has increased. Nigeria, being heavily reliant on imports for essential goods such as food, fuel, and pharmaceuticals, has seen significant price hikes, exacerbating the cost of living for ordinary Nigerians.
Also, the floating exchange rate has introduced a level of volatility and uncertainty into the economy. Businesses that rely on imported goods or raw materials have struggled to manage costs and plan for the future, given the unpredictable nature of the exchange rate and many local businesses, particularly those with foreign currency-denominated debts or those reliant on imports, have faced increased financial strain. The higher costs of servicing foreign debts and importing goods have squeezed profit margins and, in some cases, threatened business viability.
Comparisons with Previous Administrations
Under previous administrations, Nigeria maintained a fixed or managed float exchange rate system. For instance, under President Muhammadu Buhari, the CBN often intervened in the forex market to stabilise the naira, although this led to significant foreign exchange reserves depletion and created a thriving black market. Inflation and economic hardship were also prominent during Buhari's tenure, but the impact of these policies on the average Nigerian was somewhat mitigated by government subsidies and interventionist economic policies.
However, Tinubu administration's approach marks a departure from these strategies, opting instead for a market-driven exchange rate. While some economists for its potential long-term benefits laud this policy, the short-term effects have been harsh. The rapid depreciation of the naira under Tinubu has outpaced the inflationary pressures seen under previous governments, leading to more pronounced hardship for the populace.
When analysing GDP, The reforms of this administration is reflected in the GDP growth figures: Q1 2023 saw a 2.31 per cent increase, Q2 grew by 2.51 per cent, Q3 by 2.54 per cent, and Q4 by 3.46 per cent. The latest data for Q1 2024 shows a growth rate of 2.98 per cent. These figures indicate that under President Tinubu's administration, GDP growth has mostly been below 3 per cent, with the exception of Q4 2023, which exceeded this threshold. In contrast, the previous administration often recorded GDP growth above 3 per cent, peaking at 5 per cent in Q2 2021, although it experienced negative growth during the global downturn caused by COVID-19 in 2020.
Rising Cost of Living, Poverty
The floating of the naira has significantly impacted the cost of living in Nigeria. The price of basic goods and services has surged, making everyday life more expensive for the average Nigerian. This inflationary pressure has been felt acutely in food prices, transportation costs, and housing.
Furthermore, the increase in the cost of imported goods has led to a rise in poverty levels. With wages stagnant and the naira's value plummeting, purchasing power has decreased, leaving many Nigerians unable to afford basic necessities. The World Bank and other international organisations have noted an increase in the number of Nigerians living below the poverty line over the past year.
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IMF in its latest Article IV assessment on Nigeria stated: "Over the last decade, Nigeria's growth has just about kept up with population dynamics. Poverty has increased, and food insecurity is rising. The government is constrained by low domestic revenue mobilization. Governance problems remain pervasive. The external environment--cost of financing--remains difficult, high oil and gas prices notwithstanding. The new administration has set out on an ambitious reform path to restore macroeconomic stability and develop a pro-growth reform agenda."
Conclusion
As President Tinubu's first year in office draws to a close, the decision to float the naira stands out as a bold and contentious policy move. While it has led to significant short-term challenges, including a sharp depreciation of the currency and rising inflation, the administration remains optimistic about the long-term benefits. The success of this policy will ultimately depend on the government's ability to manage the immediate fallout, implement complementary economic reforms, and foster a stable and competitive economic environment.
Comparing Tinubu's approach with previous administrations highlights the increased hardship and rising cost of living faced by Nigerians. The coming years will be crucial in determining whether the float of the naira can indeed serve as a catalyst for sustainable economic growth and stability in Nigeria, or if the immediate economic distress will overshadow potential long-term gains.
