Nigeria’s recent naira reforms capture the broader story of African currencies: caught between local trade-offs and global forces, especially US policy. Its experience highlights the continent-wide struggle to balance stability, inflation, and competitiveness in a shifting world economy.
Reform and recovery
Nigeria recorded its fastest growth in nearly a decade earlier this year, following ‘bold reforms’ that included a devaluation of the naira. The reforms have lifted the West African nation to become the continent’s fourth-largest economy, according to current calculations.
The currency, which initially suffered intense volatility after the devaluation, has since entered a period of relative stability. This mirrors a broader trend across Africa, where many currencies have performed well this year despite a longer-term decline.
Currency affairs
Nigeria’s structural reforms present a political challenge. A weaker naira can help attract foreign investment, but it also risks fuelling inflation. Some commentators suggest that while it may be tempting to curb inflation by letting the naira strengthen against the dollar, it would be more prudent to seek alternative methods to fight rising prices.
Volatility has also affected businesses. Some Nigerian manufacturers have shifted their supply chains onshore to avoid the rising costs of imported inputs. For multinationals, the collapsing value of the naira during the initial devaluation reduced earnings in hard currency terms, raising questions about the long-term attractiveness of their investments.
Balancing global competitiveness, inflation control, and local growth remains a complex task. Any outlook for Nigeria’s currency must also weigh domestic political dynamics.
Global context
Of course, structural reform at home needs to be considered in a global context. Looking at the continent more broadly, the African Development Bank predicts that nearly half of all African currencies will weaken against the US dollar this year.
The bank acknowledges that domestic factors should not be discounted, pointing out that “domestic challenges such as misaligned foreign exchange regimes, fiscal deficit monetisation, political instability, and low productivity have also played a significant role”. However, the AfDB is clear that “exchange rate pressures have been largely driven by global factors”.
In the medium term, anticipating the direction of African currencies means, to no small degree, anticipating US policy. And, as Investec Chief Economist Annabel Bishop understates, “US trade and foreign policy has proved quite changeable at times, and there is a degree of expectations that the US could roll back on tariffs if the tariffs prove to have very negative effects on the US’s growth and inflation outcomes.”
In short, only time will tell.
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