Nigeria is battling to contain a historic currency crisis and soaring inflation, with the International Monetary Fund on Monday warning that almost one in 10 people are facing food insecurity.

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

President Bola Tinubu’s government came to power in May 2023, inheriting a highly precarious economic situation, characterized by anemic growth, rising inflation, low revenue collection and import-export imbalances that had accumulated over many years.

His administration promptly launched a raft of economic reforms aimed at liberalizing the economy, such as the removal of fuel subsidies and the relaxation of currency controls.

Though welcomed by foreign investors, the short-term impact has been an uncorking of the various macroeconomic issues that had been artificially contained by the interventionist policies.

IMF staff completed a mission to Nigeria in February and noted on Monday that although economic growth reached 2.8% in 2023, this falls slightly short of the level needed to support the country’s rapid population growth.

“Improved oil production and an expected better harvest in the second half of the year are positive for 2024 GDP growth, which is projected to reach 3.2 percent, although high inflation, naira weakness, and policy tightening will provide headwinds,” the Washington, D.C.-based organization said in its report on the country.

“With about 8 percent of Nigerians deemed food insecure, addressing rising food insecurity is the immediate policy priority.”

However, the IMF welcomed Nigeria’s approval of an “effective and well-targeted social protection system” along with the government’s release of grains, seeds and fertilizers and introduction of dry-season farming.

IMF commends government, central bank efforts

Mission staff noted recent improvements in government revenue collection and oil production as “encouraging,” along with the Central Bank of Nigeria’s recent decision to hike interest rates by 400 basis points to 22.75%, in a bid to contain inflation and ease pressure on the naira. This has triggered a slight strengthening of the currency in recent days.

“The interest rate announcement received a cautious welcome from investors, with the naira gaining some ground against the dollar in the official and parallel markets,” said David Omojomolo, Africa economist at Capital Economics.

“Much of positive reaction was thanks to the scale of the hike, which took the consensus (but not ourselves) by surprise. Also helpful was the recommitment to an inflation targeting framework.”

However, he suggested that there was some cause for concern in the accompanying speech from CBN Governor Olayemi Cardoso, who seemed worried by government policy.

“He delicately cast some of the inflation problem on ‘non-monetary factors’ including persistent infrastructure and insecurity problems,” Omojomolo said in a note Friday.

“He also pointed the finger at loose fiscal policy – Mr. Cardoso probably feels that the CBN’s inflation fight is not being helped by the government’s decision to reintroduce cash transfers to households.”

The central bank’s strategy for stabilizing the naira is also unconvincing, according to Omojomolo.

“Rate hikes will help attract dollars via foreign investment, but [Cardoso] and the government’s focus on alleged foreign exchange speculation shows that the authorities are still reluctant to let the naira move with market forces,” he added.

“Failure to resist these interventionist tendencies risks a fresh build-up of macro-imbalances that lay at the heart of the recent currency and inflation crisis and require monetary policy to be kept tighter for even longer at the expense of economic growth.”

Private sector momentum slowing

Data last week showed that private sector momentum in Nigeria slowed in February, with the Stanbic IBTC Bank PMI (purchasing managers’ index) dropping to 51.0 from 54.5 in January.

Any reading above 50 represents an expansion, and Nigerian PMIs have remained in positive territory for the past three months. However, the full-year average declined from 53.9 in 2022 to 50.4 in 2023.

Pieter Scribante, senior political economist at Oxford Economics Africa, said that high input price and output cost inflation were stifling private sector confidence and business activity.

“Disruptions in the non-oil economy, currency volatility, spiking inflation, higher fuel and transport costs, and food shortages should remain issues throughout 2024, while mounting price pressures, policy uncertainty, and softening consumer spending dampen economic activity and growth,” Scribante said in a research note Monday.

Oxford Economics expects real GDP growth of 2.8% in 2024 as improvements in the hydrocarbon sector offset the weakness in the non-oil economy.

“This year, recovering domestic industries, higher foreign investments, and easing inflation are upside risks,” Scribante added.

“In contrast, downside risk factors are sticky prices, exchange rate weakness, oil price volatility, and domestic insecurity.”