Nigeria is facing a severe currency crisis, as the naira has lost more than 50% of its value against the US dollar in the past year. The main cause of this crisis is the government’s decision to print more money than it had in foreign reserves, in order to finance its budget deficit and pay off its debts.
The Nigerian government has been running a fiscal deficit since 2015, when the global oil price collapsed and reduced its main source of revenue. The government borrowed heavily from domestic and foreign sources, accumulating a public debt of over 35% of GDP by 2020. However, as the COVID-19 pandemic hit the economy and reduced its tax revenues, the government faced a liquidity crunch and struggled to service its debt obligations.
How Printing Money Led to Hyperinflation
To avoid defaulting on its debt, the government resorted to printing more naira, which it used to pay its creditors and fund its spending. According to the Central Bank of Nigeria (CBN), the government’s overdraft facility increased from 2.4 trillion naira ($6 billion) in 2019 to 10 trillion naira ($24.5 billion) in 2020, equivalent to 12% of GDP. This was more than the total amount of dollars that the CBN had in its foreign reserves, which stood at $35.4 billion at the end of 2020.
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The consequence of printing more money than it had in foreign reserves was that the naira became overvalued and unsustainable. The CBN tried to maintain a fixed exchange rate of 380 naira per dollar, but this created a huge gap between the official rate and the parallel market rate, which reached over 500 naira per dollar in December 2020.
The CBN also imposed strict capital controls and rationed foreign exchange to importers and investors, creating a shortage of dollars in the economy and hampering trade and investment.
The excess supply of naira and the scarcity of dollars led to a rapid depreciation of the naira and a surge in inflation. The annual inflation rate rose from 11.4% in December 2019 to 18.1% in April 2021, the highest level since 2017.
The food inflation rate was even higher, at 22.7%, reflecting the impact of currency devaluation on import costs and domestic food production. The rising inflation eroded the purchasing power of Nigerians, especially the poor and vulnerable, who spend a large share of their income on food.
The currency crisis has also had negative effects on economic growth and development. The GDP contracted by 1.8% in 2020, the second recession in five years. The unemployment rate rose to 33.3% in the fourth quarter of 2020, the highest level on record. The poverty rate increased from 40% in 2019 to 45% in 2020, meaning that over 100 million Nigerians are living below the poverty line of $1.90 per day.
The way out of this crisis is for the government to stop printing money and adopt a credible fiscal and monetary policy framework that can restore macroeconomic stability and confidence. The government needs to reduce its fiscal deficit by increasing its revenue base and rationalizing its expenditure.
The CBN needs to allow the exchange rate to reflect market forces and eliminate the multiple exchange rate regime. The CBN also needs to tighten its monetary policy stance and reduce its lending to the government, which fuels inflation and crowds out private sector credit.
By taking these steps, Nigeria can avoid a hyperinflationary scenario that would further impoverish its people and undermine its economic prospects. Nigeria has the potential to become a prosperous and diversified economy, but it needs to address its currency crisis before it becomes too late.