Nigerians hit by record inflation, naira devaluation

Earlier this month I noticed there was less of Lagos’ notorious traffic congestion as I moved around the city. I was often told that had to do with the sharp rise in fuel costs. But, even if that was a correct explanation, few observers thought it was a great trade-off for a sluggish economy.

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As well as fuel, the naira’s rapid devaluation has meant businesses of all sizes have struggled. Multinationals including Diageo and Lafarge have had to find buyers for their Nigeria businesses as the naira’s gyrations have confounded their local operations.

But the financial reset by consumers and business owners “is not as tough as the mental adjustment,” said veteran economist Bismarck Rewane of Lagos-based Financial Derivatives. “It’s an adjustment we’ve been through before, but this one has been particularly vicious.”

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One key concern for market watchers is the central bank’s attempts to curb inflation with interest rate hikes. It’s risen to 27.50% this month from 18.75% at the start of the year. That has “resulted in eligible businesses delaying their long term borrowing plans” for investment noted Jubril Enakele, founder of Iron Capital, a Lagos-based investment bank.

Capital Economics analyst David Omojomolo is also concerned about the efficacy of the central bank’s approach, given the structural weaknesses of the Nigerian economy. “The risk for businesses going forward is interest rates staying elevated, keeping borrowing costs prohibitive,” he said. “So you could have a situation in which even if businesses get relief from inflation, they still struggle to access finance to expand.”