Nigeria pumps almost 1.5 million barrels of oil a day, making it the continent’s biggest producer. Yet this petrodollar nation faces repeated shortages of hard currency that choke its economy. President Bola Tinubu, who took office in May 2023, has moved to overhaul the country’s foreign-exchange market and attract investment, but the process has been bumpy.

The devaluation of the local naira currency stoked inflation, and the central bank reacted by sharply increasing borrowing costs — at the risk of further stifling business activity. The measures appear to be reaping dividends, however, with the naira having staged a recent rebound.

1. What’s wrong with Nigeria’s economy?

The country has suffered decades of mismanagement, its oil riches largely exploited for the benefit of a politically connected elite. Corruption is endemic, many state institutions are dysfunctional, and armed bandits and Islamist militants have free rein across swathes of the country’s north. About 40% of Nigeria’s more than 200 million people live in dire poverty, according to the World Bank, and the spike in living costs is adding to their ranks.

Beside dollar shortages, businesses have to contend with perpetual policy uncertainty and power cuts. The government used 96% of the revenue it collected in 2022 to service its debt, leaving it with little to spend on anything else. Under its previous management, the central bank played a highly unorthodox role, providing loans to small businesses and introducing multiple exchange rates. The system was aimed at improving liquidity and encouraging dollar inflows, but it had the opposite effect and gave rise to a thriving parallel currency market.

2. What’s being done to turn things around?

Tinubu’s priorities include simplifying the exchange-rate system, boosting manufacturing, improving the electricity supply, making public transport more accessible and affordable, and increasing investment in road, rail and port infrastructure. Within days of taking office, he partially scrapped fuel subsidies that had been in place since the 1970s and cost the government $10 billion in 2022 alone. He also replaced the head of the central bank and other key institutions.

The central bank has allowed the naira to trade more freely and pivoted toward inflation targeting, rather than trying to control the money supply. It raised interest rates by a record 400 basis points in February 2024 and by another 200 basis points the following month in an attempt to defend the naira and contain price pressures.

In March, the bank said it had cleared a $7 billion backlog of demand for foreign exchange from industries and foreigners. The following month, it offered to sell dollars to the country’s bureaux de change at more market-reflective rates and said it would ban the use of dollar collateral for naira loans, with the exception of government eurobonds and foreign bank guarantees.

3. Is it working?

The measures have been welcomed by the International Monetary Fund and World Bank but have been very painful for ordinary Nigerians, who face skyrocketing fuel and food costs. Inflation is close to a three-decade high, largely driven by the naira depreciation and higher gasoline prices.

The currency was devalued in June 2023 and again in January 2024 as part of a successful effort to unify the official and unofficial exchange rates. While the naira has lost more than 60% of its value against the dollar since Tinubu took office, it has been the world’s best performer since the beginning of March.

4. What are foreign investors saying?

They remain concerned about ongoing volatility in the currency markets. A stable naira would allow them to return to the country’s local-currency bonds, in turn enabling Tinubu’s administration to reduce its dependence on foreign-currency borrowing. Money managers say they’ve grown confident in the authorities’ commitment to maintaining the central bank’s independence and to fighting consumer-price pressures but that the campaign must continue until real yields — the gap between bond returns and inflation — turn positive. In March, analysts at Goldman Sachs Inc. said the combination of rate hikes and better capital inflows signal a “turning point” for the naira.

5. How have businesses been affected?

They’ve been struggling. More than 700 manufacturing companies shut down in the first quarter of 2023 alone, according to an industry association. Drugmaker GSK Plc, consumer-goods company Procter & Gamble Co., and a number of other international conglomerates have exited the country as hard currency shortages made it increasingly difficult for them to import goods and repatriate profits. Local business leaders have warned that the higher interest rates could stifle consumer spending and investment.

6. What’s the prognosis?

Tinubu’s policies should ultimately be good for the economy and lead to stronger and more inclusive growth, according to the IMF, which forecasts that output will expand by about 3.1% each year through 2028. Central Bank of Nigeria Governor Olayemi Cardoso, a former chairman of Citigroup Inc.’s Nigerian operations who was appointed to his post in September 2023, expects inflation to moderate in 2024. With many Nigerians struggling to afford even basic necessities, pressure is piling up on the government to show the policy changes are benefiting the population.