Monetary reforms went wrong. Now Nigeria faces an economic crisis.

In Nigeria, Africa’s largest economy, inflation has caused the currency to fall to a record low. Nigerians now struggle to navigate the soaring costs of food and other essential services. 

First Look

Nigerians are facing one of the West African nation’s worst economic crises in years triggered by surging inflation, the result of monetary policies that have pushed the currency to an all-time low against the dollar. The situation has provoked anger and protests across the country.

The latest government statistics released Feb. 15 showed the inflation rate in January rose to 29.9%, its highest since 1996, mainly driven by food and non-alcoholic beverages. Nigeria’s currency, the naira, further plummeted to 1,524 to $1 on Feb. 16, reflecting a 230% loss of value in the last year.

“My family is now living one day at a time [and] trusting God,” said trader Idris Ahmed, whose sales at a clothing store in Nigeria’s capital of Abuja have declined from an average of $46 daily to $16.

The plummeting currency worsens an already bad situation, further eroding incomes and savings. It squeezes millions of Nigerians already struggling with hardship due to government reforms including the removal of gas subsidies that resulted in gas prices tripling.

A snapshot of Nigeria’s economy

With a population of more than 210 million people, Nigeria is not just Africa’s most populous country but also the continent’s largest economy. Its gross domestic product is driven mainly by services such as information technology and banking, followed by manufacturing and processing businesses and then agriculture.

The challenge is that the economy is far from sufficient for Nigeria’s booming population, relying heavily on imports to meet the daily needs of its citizens from cars to cutlery. So it is easily affected by external shocks such as the parallel foreign exchange market that determines the price of goods and services.

Nigeria’s economy is heavily dependent on crude oil, its largest foreign exchange earner. When crude prices plunged in 2014, authorities used its scarce foreign reserves to try to stabilize the naira amid multiple exchange rates. The government also shut down the land borders to encourage local production and limited access to the dollar for importers of certain items.

The measures, however, further destabilized the naira by facilitating a booming parallel market for the dollar. Crude oil sales that boost foreign exchange earnings have also dropped because of chronic theft and pipeline vandalism.

Monetary reforms poorly implemented

Shortly after taking the reins of power in May last year, President Bola Tinubu took bold steps to fix the ailing economy and attract investors. He announced the end of costly decadeslong gas subsidies, which the government said were no longer sustainable.

Meanwhile, the country’s multiple exchange rates were unified to allow market forces to determine the rate of the local naira against the dollar, which in effect devalued the currency.

Analysts say there were no adequate measures to contain the shocks that were bound to come as a result of reforms including the provision of a subsidized transportation system and an immediate increase in wages.

So the more than 200% increase in gas prices caused by the end of the gas subsidy started to have a knock-on effect on everything else, especially because locals rely heavily on gas-powered generators to light their households and run their businesses.

Why is the naira plummeting in value?

Under the previous leadership of the Central Bank of Nigeria, policymakers tightly controlled the rate of the naira against the dollar, thereby forcing individuals and businesses in need of dollars to head to the black market, where the currency was trading at a much lower rate.

There was also a huge backlog of accumulated foreign exchange demand on the official market – estimated to be $7 billion – due in part to limited dollar flows as foreign investments into Nigeria and the country’s sale of crude oil have declined.

Authorities said a unified exchange rate would mean easier access to the dollar, thereby encouraging foreign investors and stabilizing the naira. But that has yet to happen because inflows have been poor. Instead, the naira has further weakened as it continues to depreciate against the dollar.

What are authorities doing?

CBN Gov. Olayemi Cardoso has said the bank has cleared $2.5 billion of the foreign exchange backlog out of the $7 billion that had been outstanding. The bank, however, found that $2.4 billion of that backlog were false claims that it would not clear, Mr. Cardoso said, leaving a balance of about $2.2 billion, which he said will be cleared “soon.”

Mr. Tinubu, meanwhile, has directed the release of food items such as cereals from government reserves among other palliatives to help cushion the effect of the hardship. The government has also said it plans to set up a commodity board to help regulate the soaring prices of goods and services.

On Feb. 15, the Nigerian leader met with state governors to deliberate on the economic crisis, part of which he blamed on the large-scale hoarding of food in some warehouses.

“We must ensure that speculators, hoarders, and rent seekers are not allowed to sabotage our efforts in ensuring the wide availability of food to all Nigerians,” Mr. Tinubu said.

By Feb. 16, local media were reporting that stores were being sealed for hoarding and charging unfair prices.

How are Nigerians coping with tough times?

The situation is at its worst in conflict zones in northern Nigeria, where farming communities are no longer able to cultivate what they eat as they are forced to flee violence. Pockets of protests have broken out in past weeks but security forces have been quick to impede them, even making arrests in some cases.

In the economic hub of Lagos and other major cities, there are fewer cars and more legs on the roads as commuters are forced to trek to work. The prices of everything from food to household items increase daily.

“Even to eat now is a problem,” said Ahmed in Abuja. “But what can we do?”

This story was reported by The Associated Press.