The largest economy in Africa is facing a currency crisis and rising inflation.

• Nigeria is currently experiencing one of its worst economic crises in years due to inflation approaching 30% and its currency reaching a record low.
• In January, the headline consumer price index (CPI) increased by 29.9% year-on-year, reaching its highest level since 1996, according to the latest data from the National Bureau of Statistics.
• Protests erupted nationwide over the weekend due to rising living expenses and economic difficulties.

Nigeria is facing one of its worst economic crises in years due to annual inflation nearing 30% and a currency in freefall, resulting in nationwide outrage and protests.

On Monday, the Nigerian naira reached a new low against the U.S. dollar on both the official and parallel foreign exchange markets, falling to nearly 1,600 naira from around 900 naira at the beginning of the year.

According to local media reports, President Bola Tinubu announced on Tuesday that the federal government plans to obtain at least $10 billion to enhance foreign exchange reserves and stabilize the naira.

Since May 2023, the currency has decreased by approximately 70% due to the challenges inherited by Tinubu upon taking office, as he pledged to implement reforms to stabilize the economy.

To revive the struggling economy and entice foreign investment, Tinubu abolished Nigeria's multiple exchange rates and allowed market forces to determine the exchange rate, causing the currency to plummet. In January, the market regulator altered its method of calculating the currency's closing rate, resulting in another unofficial devaluation.

The decline in overseas investment and crude oil exports has resulted in a surge of demand for U.S. dollars due to years of foreign exchange controls.

According to Pieter Scribante, senior political economist at Oxford Economics, a weakened exchange rate in Nigeria should lead to an increase in imported inflation, which will intensify price pressures in the country.

Africa's largest economy is heavily dependent on imports to meet the needs of its growing population, which exceeds 210 million people.

Scribante stated that concerns about shrinking disposable incomes and increasing cost-of-living pressures should persist in 2024, which would continue to limit consumer spending and private sector growth.

Meanwhile, inflation remains high, with the consumer price index reaching 29.9% year-on-year in January, its highest level since 1996. The increase is mainly due to a persistent rise in food prices, which increased by 35.4% last month compared to the previous year.

Government reforms, including the removal of gas subsidies, have led to a surge in gas prices, exacerbating the negative impact of the plummeting currency and prompting protests across the country over the weekend.

In late July, President Tinubu announced that the government had saved over 1 trillion naira ($666.4 million) by removing subsidies, which would be used for infrastructure investment.

Nigeria is facing numerous economic challenges, including high inflation, a weak currency, rising government debt, high unemployment, power shortages, and declining oil production, which is its primary export. Additionally, violence and insecurity in many rural areas exacerbate these pressures.

The government's control over inflation is at risk due to market liquidity, exchange rate pressures, and food and fuel shortages, according to Oxford Economics' Scribante.

The CBN may reintroduce import bans and FX restrictions due to strong import demand, which could worsen domestic product scarcities and increase inflation.

Nearly 33% year-on-year inflation is predicted to occur in the second quarter of 2024, according to Oxford Economics, and may persist due to the numerous economic risks that lie ahead.

Scribante stated that the policy rate could be raised this quarter due to the increase in hawkishness by the CBN and the rise in inflation. The current policy rate is 18.75%.

Scribante stated that we anticipate a combined 200 bps in rate hikes at the upcoming MPC meetings in February and March this year. However, we believe that additional hikes are necessary to control inflation.

According to Jason Tuvey, the deputy chief emerging markets economist at Capital Economics, the CBN may choose to implement a larger interest rate increase during its upcoming meeting on Feb. 26 and 27.

Whether President Tinubu's policy shift is regaining momentum will be tested in the upcoming meeting, according to Tuvey's note on Thursday.

The MPC aims to regain some of its inflation-fighting reputation by raising interest rates by 400 basis points, to 22.75%.