On June 15th, Nigeria’s central bank announced it would abandon its currency’s dollar peg. Since then, the naira has fallen 61% against the US dollar, generating difficulties for both foreign and domestic businesses in Africa’s most populous country. Nestle Nigeria, for instance, saw a 94% drop in profits as the currency depreciated. The currency’s move also led to Nigeria losingits title as Africa’s largest economy – a symbolic downgrade that succinctly summarizes the many challenges facing the country.
Perhaps the most disruptive development in the Nigerian economy over the past five years has been the drop in the price of oil, which accounts for 70% of government revenue and 95% of export income. As oil prices fell from over $100 a barrel in June, 2014 to under $50 today, government revenues plunged, leaving Nigeria with a $7 billion budget deficit.
The currency’s move also led to Nigerialosing its title as Africa’s largest economy.
Amidst the decline in oil revenue, the government’s prolonged peg of the currency to the dollar led to foreign exchange shortfalls and import barriers—on items including margarine, private jets, wooden doors, and even toothpicks—significantly hurting both local and multinational businesses.
These measures drove airlines including United and Iberia to cut off routes to Nigeria. They also left domestic operators with painful fuel shortages. Business in other industries suffered as well, with companies like Nestle’s Nigerian operation struggling to access foreign exchange and the Africa President of Unilever calling the maintenance of the policies “very insane.”
Meanwhile, militants known as the Niger Delta Avengers have blown up pipelines, helping strip Nigeria of its title as Africa’s largest oil producer. Sabotage has cost the country 700,000 barrels per day, sendingthe country’s output down to its lowest level in almost three decades. Shell’s production in Nigeria dropped 24% between the first and second quarters of this year alone. The government has engaged the militants in peace talks (as well as paying them stipends), but analysts are not optimistic that peace is imminent.
In the north, the military continues to battle Boko Haram terrorists, whoseviolence has displaced 2.2 million people. At the same time, regional tensions haveerupted elsewhere in the country, including land disputes that have killedmore people this year than Boko Haram.
Given this backdrop, it shouldn’t be a surprise that the economy is in tatters. Growth slowed from 6.3% in 2014 to 2.8% last year, and the IMF says the economy could shrink by 1.8% in 2016. In June, inflation rose to an 11-year high of 16.5%, while business confidence has hit all-timelows. The unemployment rate is over 12%, and major electricity companies are threatening to cut off power if the government does not pay them the hundreds of millions of dollars it owes.
If all that wasn’t enough, a moth ravaged the tomato crop in the northern Nigerian state of Kaduna, driving up the local price of a basket of tomatoes from as little as 300 naira to 42,000—a 14,000% increase (and, incidentally, sparking ill-will towards the decadent annual tomato-throwing festival in Spain on social media). Locals called it “Tomato Ebola,” and the regional government declared a state of emergency.
Culled from: LinkedIn