The Naira in Freefall: Exposing the Root Causes of Nigeria’s Economic Woes

By J.D. Emphraim

It has been reported today that the Central Bank of Nigeria (CBN) has raised the interest rate to 27.50%

I am not an economic expert but a layperson, and below is my understanding of what has (or will) happen:The CBN appears to still be grappling with the issue of excess liquidity in the economy.

My elementary understanding of economics suggests that when there is excess liquidity in the system, the central bank can use various monetary instruments to address it.

One such tool is manipulating interest rates to encourage saving. In this case, the rates have been raised to discourage spending and borrowing while incentivising savings. Essentially, people are being discouraged from taking loans because the repayment interest on such loans will be prohibitively high.

This move is aimed at reducing the amount of money in circulation to help control the growing inflation in the economy.However, this action has broader implications. Higher interest rates make financing for investments much more expensive. This, in turn, negatively affects investments in the economy, which subsequently reduces employment opportunities.

With fewer jobs, the incomes of ordinary Nigerians are curtailed, leading to increased unemployment. Excess liquidity often manifests when too much money is pumped into circulation, resulting in “too much money chasing too few goods.” This scenario occurs when production levels of goods and services remain unchanged despite the increased money supply.In Nigeria’s current situation, however, the issue is different.

The excess money is concentrated in the hands of a very small percentage of the population. These individuals keep significant amounts of liquidity outside the banking system or exchange it for the limited foreign exchange (forex) available. Consequently, the majority of Nigerians, who should drive effective demand, lack sufficient disposable income.

As a result, while goods may be available, there is little to no “effective demand” for them, a critical factor in economic equilibrium.To some of us, the appropriate action by the monetary authorities should focus on addressing the excess liquidity held by the few. Additionally, measures must be taken to ensure the common man, who is not responsible for the excess liquidity, is protected and supported.

Another critical issue is the weak linkage between the true causes of the inflationary spiral and the monetary policies being implemented. Many of us believe this inflation is largely driven by the floatation of the naira against the dollar. Previously, the naira was pegged to the dollar, but now it has been allowed to float freely.

The source of Nigeria’s foreign exchange is heavily reliant on crude oil, a mono-product economy. Over the years, massive oil theft and production declines have exacerbated forex shortages. Official crude oil production plummeted from a peak of 2.2 million barrels per day to as low as 800,000 barrels per day at one point in time.

While production has since recovered to approximately 1.5 million barrels per day, it is still below Nigeria’s OPEC quota of 1.742 million barrels per day. Moreover, it should be noted that OPEC has recent readjusted crude oil production ceiling for Nigeria to 1.38 million barrels per day (mbpd), down from the previous quota of 1.742 mbpd. This reduction aligns with OPEC’s strategy to stabilise oil prices amidst global market conditions.

This shortfall, coupled with mismanagement and policy missteps, has further strained the economy, limiting the availability of forex and driving inflation higher. Addressing these root causes, rather than relying solely on interest rate adjustments, would likely yield more sustainable results.

The Nigerian economy remains highly import-dependent, which means any fluctuations in our primary source of foreign exchange (forex) – crude oil – have significant ripple effects. Allowing the Naira to float meant letting it find its true value relative to the dollar.

However, this adjustment occurred against the backdrop of excessive liquidity in the economy, partly caused by the Central Bank of Nigeria’s (CBN) questionable “ways and means” practices – essentially printing unbacked paper money.

Reports suggest that approximately ₦25 trillion was injected into the economy, compounding inflationary pressures.This excess liquidity disproportionately benefited a privileged few with access to these funds.

These individuals used the surplus Naira to absorb available forex, often transferring the proceeds abroad or hoarding them outside the banking system. As a result, it was claimed that the value of the Naira plummeted by an estimated 400–500% against the dollar.

Although after fact-checking, it was discovered that the Naira lost an estimated 50.1–72% of its value against the US Dollar since 2023, when it was devaluated by the Tinubu Administration, and not 400-500%, this must be a big percentage that all well-meaning Nigerians must frown at.

Meanwhile, the incomes of most Nigerians stagnated, with unemployment remaining alarmingly high.Even with the increase in the minimum wage to ₦70,000, it fails to match the scale of currency depreciation. If the Naira has indeed lost 400–500% of its value against the dollar, then wages should have risen proportionately to preserve purchasing power. Despite fact-checking has shown that the Naira lost 50.1%-72% not 400% to 500%, nonetheless, wages should have risen correspondingly.

Yet, Nigerians still depend on the dollar to import essential goods, further driving up the cost of living and creating what economists call “ineffective demand” – a situation where goods exist but are unaffordable for the majority.Addressing inflation by merely raising interest rates, as the CBN has done, seems misdirected.

While higher rates aim to reduce liquidity and curb inflation, they disproportionately hurt ordinary Nigerians and small businesses by making loans unaffordable. This approach neglects the root causes of inflation and appears to assume – wrongly – that excess liquidity is widespread across the population.

In reality, the excess funds are concentrated in the hands of a corrupt few, mostly from the previous administration.

The monetary authorities must adopt a more targeted approach, addressing inflation at its sources.

Recommendations include:Boosting Crude Oil Production and LNG Exports: Nigeria’s crude production fell drastically from a peak of 2.2 million barrels per day (mbpd) to about 800,000 bpd before recovering to approximately 1.5 mbpd, and recently, 1.38 mbpd. Stabilising and increasing output while curbing oil theft is essential for restoring forex inflows.Fixing the Naira’s Value against the Dollar:

Pegging the Naira at a subsidised rate could offer temporary relief, though this must be carefully managed to avoid exacerbating forex shortages. Prosecuting Economic Crimes: Identifying and prosecuting individuals who siphoned off excess liquidity would deter future corruption.

Redenominating the Naira: Removing one decimal point from the Naira (e.g., ₦300 becoming ₦30) could stabilise the currency, as was successfully implemented during Buhari’s military rule in the 1980s.

Stimulating Investments: Encouraging domestic and foreign investments by creating a conducive economic environment is critical. Security improvements, tax incentives, and infrastructural development can help attract investors.Achieving these goals depends heavily on resolving the country’s worsening security crisis, particularly in the North.

Insecurity in Northern Nigeria: The insecurity plaguing the North, once the nation’s food basket, has escalated to alarming levels.

Farmers cannot access their fields due to threats from bandits and terrorist groups. What’s more troubling is the growing involvement of international terrorist organisations, further destabilising the region. This insecurity is compounded by political instability in neighbouring West African countries, undermining cross-border cooperation and security.

Nigeria’s porous borders exacerbate the issue, enabling the unchecked movement of arms and insurgents.Addressing these challenges requires decisive action.

President Tinubu might consider declaring a state of emergency in the core Northern states. Such a measure would temporarily suspend the constitution in affected areas, enabling military governance to restore order. While drastic, this approach reflects the inadequacy of current civil authorities to tackle the crisis effectively.

Additionally, the government must sensitise border communities about patriotism and security vigilance while fostering regional collaboration to address cross-border threats.

Resolving insecurity is not just about restoring peace but also about laying the groundwork for economic stability and growth. Without security, investments will dwindle, hunger will persist, and the promise of a prosperous Nigeria will remain out of reach.By J.D. Ephraim