Further Nigerian and regional market impacts expected with the floating of the Naira

Declining global crude oil prices have resulted in significantly reduced export earnings in Nigeria, where oil accounts for approximately 70 percent of government revenue. The resulting depreciation of the local currency, the Naira (NGN), has increased both imported food and fuel prices and led to increasing demand for local cereals in Nigeria. The Central Bank of Nigeria’s (CBN) decision to allow the Naira to float against the US dollar is expected to further devalue the currency. This depreciation is expected to reduce purchasing power across the country, with especially serious consequences in the northeast where more than three million people already face significant difficulty meeting their basic food needs due to the ongoing Boko Haram conflict. Populations who depend on Nigerian agriculture and labor markets for their livelihoods are also likely to be affected. Close and continued monitoring of Nigeria’s economy, as well as of local and regional markets is necessary given further expected impacts on staple food, cash crop, livestock, and labor markets.

International crude oil prices fell by 25 percent over 2015, leading to a 40 percent drop in Nigerian exports and doubling the government deficit (IMF, Feb 24, 2016). As a result, Nigeria’s foreign reserves have dropped by more than $2 billion USD since the start of 2016 to $26.4 billion (CBN). Domestic fuel price increases of 67 percent, in addition to the limited supply of hard currency for imports, is causing prices for imported and local foods to increase (Figure 1), forcing many households to shift towards cheaper cereals, including local millet and sorghum. The CBN has kept the official exchange rate fixed at 197 to one US dollar, but allowed the currency to float against the dollar today. This move will harmonize the official and parallel exchange rates, resulting in a rapid, further depreciation of the Naira.

Regional demand for Nigerian cereals, which peaks during the April to September lean season, has increased as Nigerian export prices have declined with the weakening Naira. This additional demand is further contributing to the increase in domestic cereal prices in Nigeria, affecting both market-dependent households in urban areas, as well as poor, rural households. May 2016 prices for key staple cereals (maize, millet, and sorghum) in Maiduguri were between 37 and 66 percent above 2015 levels. Larger price increases were noted for imported rice and yams. These increases exacerbate the existing food security Crisis (IPC Phase 3) brought on by regional Boko Haram conflict, especially for conflict-affected resident populations, including the 1.86 million internally displaced people (IOM and NEMA, April 2016), who are already facing difficulty meeting their basic food needs.

Nigeria’s economy represents 65 percent of total West African GDP (ReSAKSS) and accounts for 44 percent of regional cereal demand (FEWS NET). Nigeria is also the region’s largest livestock consumer, importing 30 percent of requirements. As Nigerian purchasing power and demand declines in the face of its depreciating currency, livestock prices in Niger and other neighboring countries may decrease, affecting pastoral incomes, which will peak from June to September this year. Reduced demand and prices for some livestock in Burkina Faso, Cameroon and Niger is already being reported. Although regional cereal prices may remain stable, cash crops earnings (cowpeas, peanuts), which typically peak from November to January, may be reduced during the 2016/17 consumption year as Nigeria’s capacity to purchase decreases. Pastoralists, cash crop producers, transport providers and migrant laborers from the Sahel who are dependent on Nigerian markets are expected to see incomes decline.

With the agricultural lean season beginning across the region, staple food prices and market supplies should be closely monitored, especially as demand for cereals and livestock rise during the Ramadan and Tabaski holidays in June and September, respectively. Further depreciation of the Naira will be particularly impactful in conflict-affected northeast Nigeria, where more than 3 million people are already in need of urgent humanitarian assistance. Additionally, both public and private sector responses to the Naira devaluation should be closely watched over the next month to understand the magnitude of the impacts both domestically and regionally. Finally, regional mechanisms should be established to monitor trade flows and to understand how remittance earnings have been affected.