Nigeria struggles to control currency depreciation and increasing food insecurity.

• Africa's largest economy is facing a cost-of-living crisis due to soaring food prices, which led to an annual inflation rate of 29.9% in January. Additionally, the currency has fallen to an all-time low.
• The IMF viewed the enhancements in government revenue collection and oil production as "encouraging," in addition to the Central Bank of Nigeria's recent decision to increase interest rates.
• Last month, the private sector in Nigeria experienced a slowdown in momentum, as evidenced by the Stanbic IBTC Bank PMI falling from 54.5 in January to 51.0.

The International Monetary Fund has warned that almost one in 10 people in Nigeria are facing food insecurity due to the country's ongoing struggle to control its currency crisis and high inflation.

Inflation in Africa's largest economy hit an annual 29.9% in January, driven by soaring food prices that have triggered a cost-of-living crisis. Meanwhile, the naira currency plummeted to an all-time low of around 1,600 against the U.S. dollar in late February.

In May 2023, President Bola Tinubu's government assumed power, facing a highly precarious economic situation with anemic growth, rising inflation, low revenue collection, and import-export imbalances that had accumulated over many years.

His government swiftly implemented economic reforms to liberalize the economy, including the withdrawal of fuel subsidies and the easing of currency restrictions.

The interventionist policies that had been welcomed by foreign investors have resulted in an uncorking of macroeconomic issues in the short term.

In February, IMF staff completed a mission to Nigeria and found that while the country's economic growth was 2.8% in 2023, it was not enough to sustain the rapid population growth.

The Washington, D.C.-based organization stated in its report that improved oil production and a better harvest in the second half of the year will positively contribute to 2024 GDP growth, which is projected to reach 3.2 percent. However, high inflation, naira weakness, and policy tightening will present challenges to this growth.

"Immediately addressing rising food insecurity, which affects approximately 8 percent of Nigerians, is the top policy priority."

The IMF praised Nigeria's decision to establish a social protection system and distribute grains, seeds, and fertilizers, as well as the introduction of dry-season farming.

IMF commends government, central bank efforts

The recent improvements in government revenue collection and oil production were considered "encouraging" by mission staff. Additionally, the Central Bank of Nigeria's decision to increase interest rates by 400 basis points to 22.75% has helped to control inflation and ease pressure on the naira, resulting in a slight strengthening of the currency in recent days.

David Omojomolo, Africa economist at Capital Economics, stated that investors gave a cautious welcome to the interest rate announcement, and the naira strengthened against the dollar in both the official and parallel markets.

"The positive reaction was mainly due to the surprise scale of the hike, which helped in achieving an inflation targeting framework."

CBN Governor Olayemi Cardoso expressed concern in her speech about government policy, which was suggested by him as a cause for worry.

Omojomolo stated in a note on Friday that he attributed some of the inflation problem to "non-monetary factors" such as persistent infrastructure and insecurity issues.

"Mr. Cardoso likely believes that the CBN's inflation battle is hindered by the government's decision to reintroduce cash transfers to households."

Omojomolo believes the central bank's strategy for stabilizing the naira is unconvincing.

The government's focus on alleged foreign exchange speculation indicates that they are still hesitant to allow the naira to move with market forces, despite the belief that rate hikes will attract foreign investment and bring in dollars.

"If we do not resist these interventionist tendencies, we risk a new build-up of macro-imbalances that led to the recent currency and inflation crisis, which means we need to keep monetary policy tighter for longer, even if it slows down economic growth."

Private sector momentum slowing

In February, the private sector in Nigeria experienced a slowdown in momentum, as evidenced by the Stanbic IBTC Bank PMI falling from 54.5 in January to 51.0.

Despite the three-month positive trend of Nigerian PMIs, the full-year average decreased from 53.9 in 2022 to 50.4 in 2023.

Oxford Economics Africa's senior political economist, Pieter Scribante, stated that high input price and output cost inflation were negatively affecting private sector confidence and business activity.

Scribante stated in a research note on Monday that the non-oil economy, currency fluctuations, rising inflation, increasing fuel and transportation costs, and food scarcity will continue to be pressing concerns in 2024. Additionally, mounting price pressures, policy instability, and declining consumer spending will negatively impact economic activity and growth.

The hydrocarbon sector is expected to drive real GDP growth of 2.8% in 2024, despite the non-oil economy's weakness.

Scribante stated that this year, the potential risks of reviving domestic industries, increasing foreign investments, and reducing inflation are positive factors.

"While upside risk factors are favorable market conditions, sticky prices, exchange rate strength, oil price stability, and domestic security are downside risk factors."