Nigeria is currently in a recession after unpegging from the U.S. dollar, and the decreased dollar supply has reduced output and created obstacles for companies to pay their debts. A challenge that Nigeria is trying to overcome is the lack of investment in infrastructure during the oil boom years which would have allowed for more sustainable growth.
The economic downturn can largely be attributed to drop in oil prices, and the loss of investment can be attributed to the fixed foreign exchange policy. Approximately three months ago, Nigeria switched to a “purely market-driven” currency system after holding the currency at an exchange rate because the price of oil had fallen. The central bank’s policy of determining what can be done with the dollars given at official exchange rate has begun to increase demand in the parallel market. The currency gap allows those allocated dollars at the official rate to nearly double their returns on the parallel market.
The peg was meant to protect the Nigerian Naira and encourage growth in non-oil industries; however, the peg kept economic growth low during that period. Prior to the dollar peg being lifted, the limits on the foreign exchange allowed for a parallel black market to exist, hampering importers and the manufacturing sector. The economic crisis can be largely attributed to heavy reliance on crude products, which accounted for 90% of foreign income. In the future, the energy and agriculture industries are areas that Nigeria has a lot of potential to grow and help diversify its economy.
The International Monetary Fund has forecast GDP to shrink by 1.8 percent by the end of 2016, and which is significant as Nigeria accounts for around a third of sub-Saharan Africa’s GDP. According to the IMF, Nigeria has struggled from the 50% drop in crude prices, the presence of militant attacks or installations, and foreign currency shortages. FDI fell by 37% during the second quarter of 2016, capital inflows decreased by 75.7%, and inflation hit 17.1%, the highest rate in a decade.
The African Development Bank will continue to support Nigeria as they consider the country to be too large to fail in the region. The African Development Bank will increase the amount of loans available to Nigeria to $4.1 billion in two years and $10 billion in 2019. These funds are meant to increase the generation and transmission of electricity and boost farming output. A portion of the funds have been allocated to an energy fund meant to finance off-grid projects and renewable-energy entrepreneurs. The African Development Bank has also agreed to help fund the rebuilding in northeastern region to improve infrastructure and services, like water and health.