What ails the naira? A diagnosis of rising poverty in Africa’s largest economy

Over the past decade and half, poverty in Nigeria continues to accelerate as millions of vulnerable persons watch their wealth and sustenance diminish as the years go by.

In 2023, the number of Nigerians living below the poverty line crossed the 100-million mark. Back in 2013, just 10 years earlier, only 61 million Nigerians lived in poverty. By 2018, the number had risen to 81 million and by 2023, 104 million Nigerians were poor. Expectedly, the poverty scourge hit harder in cities than in rural areas. Yet, the number of poor Nigerians doubled in just 12 years, as the army of poor persons approach the country’s total population of just 20 years ago.

Now, is this a trend common to all emerging and developing economies across the world? Evidence shows that Nigeria, Egypt, and Pakistan are among a few countries that combine large, fast-growing population with rising poverty levels. Nevertheless, data from other developing countries offer a measure of hope and some insights. Between 2005 and 2021, India lifted about 415 million persons out of poverty. This was despite the disruptions of COVID-19. Similarly, between 2012 and 2017, Indonesia reduced the number of its poor by 8 million. Between 1980 and 2020, China reduced its population of poor persons by nearly 800 million, and accounted for about 3 quarters of global poverty reduction since 1980. India, Indonesia, and China are not only large economies but are among the world’s largest by human population.

So why does poverty continue to rise in Nigeria? Why do people who once lived comfortably have to face deep erosion of their purchasing power and watch their fortunes ebb away? Why is it that in Nigeria, it is nearly impossible for the majority to attain and maintain decent standards of living? Why does poverty remain an ever-present threat?

At the heart of rising poverty in Nigeria is a currency that, over the long term, has been on a path of steady decline despite occasional bursts of short-term gains. Before the recent foreign exchange reforms, Nigeria experienced multiple bouts of naira devaluation, each of which revealed a deterioration in the country’s economic fundamentals in the medium term. Since the floating of the naira in 2023, the currency has experienced large short-term swings, but the long-term trend still shows persistent decline.

The weakening of a currency manifests in two ways: inflation in the domestic market and devaluation relative to other currencies. In 2023, Nigeria’s inflation rate, at 27%, was at least triple the emerging market average of 8.5% and nearly 4 times the average for developing countries. Between 2016 and 2024, the value of the naira, measured by the local market price of bread, rice, and eggs fell by at least 78%. To put this directly, one thousand naira that could buy a crate of eggs in 2016 could barely pay for 5 pieces of eggs in 2024. The same amount could buy 4 loaves of 500g bread in 2016 but could not buy a single loaf of the same size in 2024!

Trends in the foreign exchange market shows similar fortunes as the naira shed more than 80% of its value in just a decade. In 2016, one million naira was worth at least US$5,100. By 2024, the same one million naira could barely exchange for US$750. This is an 85% value loss. Relative to the British pound, the naira fared the same with an 83% value loss. One million naira that exchanged for more than 3,500 pounds in 2016 could barely purchase 600 pounds in 2024. Foreign investors with naira-denominated assets naturally felt stuck and some could barely wait to exit the country. Unfortunately, this has own knock-on effects in terms of job losses, further declines in aggregate demand, and reduction in the economy’s active capacity to produce.

But what ails the naira? Why does its value decline over the long term?

The persistent decline of the naira is rooted in multiple factors, some structural and others cultural. Most prominent are issues around the country’s economy’s structure, its demographic profile, productivity trends, and a weak culture of making things.

The structure of Nigeria’s economy today cannot support a stable currency. First, though fairly diversified across industries, the economy remains dominated by extractive activities and low-to-medium value services. Except for a few areas, there is limited presence of high-value activities in both tangible and intangible products. Secondly, Nigeria’s export basket is still undiversified. Mineral exports, prominently oil and gas, which accounted for 91.4% of total exports in 2014 grew to account for 92% by 2023. For export earnings, Nigeria’s resource dependence is both high and persistent. Thirdly, the productive sector still lacks reasonable economic complexity. A country barely capable of producing beyond basic necessities, cannot reasonably expect to have a stable currency. In the face of volatile exports, the surging consumption demand for luxury and non-basic items will simply not allow the naira find a resting range.

Closely related to Nigeria’s economy’s structure is the country’s population profile. Based on verifiable evidence, no country with a population in excess of 100 million and lacking a strong productive base can expect to hold its currency stable, its natural resource endowments notwithstanding. With an estimated population in excess of 215 million and a median age below 19 years, Nigeria has a huge dependency burden. Beyond the size statistics, limited access to quality education also impedes progress. Moreover, an age-old perspective that views education through the narrow sense of formal schooling continues to misguide policy actions necessary to reap the demographic dividends of a large, fast-growing population. The result: millions of youths remain unskilled to make valuable economic contribution regardless of years of formal schooling.

The combined effect of a dysfunctional economic structure and a large but unskilled youth population is low economic productivity. A stark image of Nigeria’s productivity in recent years is the country’s per capita GDP which declined from US$2,490 in 2014 to US$2,450 by 2023. As a valid measure of economic productivity, the trend of income per head in Nigeria is worse than flat. It is on the decline, despite the rising productivity of an exceptional few.

A crucial, but often overlooked driver of Nigeria’s economic and currency malaise is the unspoken but evident aversion for the culture of making things. This is harmful from two ends: no country can sell (export) what it does not produce, and every country has to buy (import) what it needs but does not make. For a country where both policy and institutional arrangements seem designed (perhaps except on paper) to subvert productive enterprise, and where societal values celebrate and promote establishment appointments over economic accomplishment, it is no surprise that the manufacturing sector consistently lags services in both scale and pace of growth.

Yet, in emerging and developing economies, the culture of making things is a primary factor that separates countries that attain currency stability and reduce poverty from those whose fortunes stall and their currencies decline in value. Beyond China and India (outliers by reason of their sheer size and pace of growth), other high-performing emerging markets such as Indonesia, Malaysia, Singapore, Thailand, Korea, and Vietnam all exhibit and promote the culture of making things. This is evident from the quantum and growth rate of both manufacturing GDP and processed exports from these countries. More importantly, it reflects the depth of institutional and cultural support that enterprise enjoys in countries that achieve and sustain economic stability.

Not only has Nigeria’s manufacturing base failed to expand, the country has fallen into what is called “premature de-industrialization”, a situation where manufacturing stalls and then begins to decline long before the economy attains self-sufficiency in production to meet its own consumption needs across human requirements. In real terms, Nigeria’s manufacturing output has stalled for over a decade, in spite of moderate growth in the economy.

In view of this diagnosis of what ails Nigeria’s economy, can the naira be redeemed? Can it once again become and remain a stable currency? The answer: a strong but conditional YES. Resolving Nigeria’s worsening poverty situation is NOT beyond redemption but the salvage work requires more than assurances of hope that things will get better. Yes, hope and optimism are vital ingredients for progress, however, neither nor both will suffice to address either the impact or root cause of long-term economic ailments. In the medium-to-long term, the naira can, and must be saved. On its fate rests the fate of millions of adults (old and young), children and even generations yet unborn. To allow the naira to languish further is to put the destiny of hundreds of millions of Nigerians in jeopardy.

While remarkable gains have been secured from reforms instituted in the past 21 months, there remains acute need for further institutional and, in particular, cultural shifts for the naira to begin to regain, or at least maintain strength for the journey ahead.

Adeoye, CFA, is a director at Quartus Economics, an economic, strategic and transaction advisory firm. He is based in Lagos, Nigeria.