Nigerian economy: Why the Naira is failing

In recent months, the Naira has been on a roller coaster journey. On the illicit market, the Naira depreciated to N545 per USD in September 2021. By the end of trading on October 21, 2022, the black market exchange rate for the Naira was N751/$1. On the other hand, the disparity between the parallel and official rates has been discouraging; the difference is greater than N200, which is why the Naira closed on October 20, 2021 at N437.28/$1.

The aforementioned figures and pressure on the Naira are readily attributable to the new CBN policy that halts the remittance of foreign currency to Bureau de Change (BDC) merchants, thereby ensuring that banks are the primary retailers of foreign currency. The Nigerian Naira has fallen precipitously as a result of this singular action and other factors.

The topic is why the Naira has been declining. This occurs both during economic expansion and contraction, so what is the underlying problem with the Naira?

This article aims to provide answers to the aforementioned queries and shed light on the underlying cause of the Naira’s rise and fall.

Prime Minister of Nigeria Tafawa Balewa with other dignitaries during the independence signing ceremony.

History of the rise and fall of the Naira

The significance of history cannot be overstated; history must be evaluated to determine the fundamental causes of problems. The history of the Naira in the Nigerian economy is crucial to understanding why the Naira is faltering.

In January 1973, the Naira supplanted the Nigerian pound and was pegged at N1 to 10 British Shillings; it was also sold at N1 to 0.62 US dollars.

In 1985, the Babaginda military regime took power and pursued a neoliberal structural adjustment programme that inflicted a severe blow to the Nigerian economy and resulted in the devaluation of the Naira to $1.75 USD. When Babaginda departed office in 1993, the Naira was worth N22 per dollar.

The situation never improved because, beginning in 1999, the Naira was valued at N92.34 per dollar, declining to N132 in 2004. After the election transition in May 2015, the value of the Naira was N198.914 per dollar. In 2018, the value of the Naira fell to N306,08 per dollar, before attaining its current level in 2022.

These statistics demonstrate that the Naira problem existed prior to the current administration.

The problem with the Nigerian Naira

Nigeria is experiencing an economic crisis, but the Naira depreciation is the most evident symptom. Since the central bank of Nigeria (CBN) banned the sale of foreign exchange to BDC, the black market exchange rate for the Naira has declined from N505/$1 to N751/$1 (as of press time).

The same policy was implemented by the central bank in 2017, resulting in the Naira falling from N405 to N500 per dollar. The CBN then altered its policy to encourage more liquidity into the economy and reintroduced N365 per dollar for the Naira.

Some analysts believe that the recent action by the central bank was intended to deter speculators who engage in the infamous ‘pump and dump’ strategy with the Naira.

Dumebi Udegbunam, a fixed trader at UBA, told Nairametrics that Demand and Supply are the primary cause of the fervent Naira depreciation. He remarked that Nigeria is an import-dependent nation; consequently, it sends out more foreign currency (Forex) than it receives.

Recent reports from the National Bureau of Statistics (NBS) indicate that in the second quarter of 2021, Nigeria recorded a trade deficit of N1.9 trillion, which inadvertently led to a decline in the available Forex.

Nigeria’s demand for foreign exchange has increased from $500 million in 2015 to $6 billion in 2021.

Dr. Omobola Adu, a Research Analyst at GDL, stated that the Naira will continue to depreciate due to the present trade deficits, which force the government to borrow. He concluded by asserting that this would only increase the burden on the Naira.

The law of supply and demand governs the open market. When the demand for a product exceeds the available supply, scarcity ensues.

The economics of scarcity leads to an increase in product prices. In essence, Nigeria requires more foreign currency than it is currently earning.

BDCs have been the primary distributors of foreign currency in Nigeria, but a recent CBN policy has made foreign currency scarce on the illegal market, causing the Naira to depreciate.

To save the Naira, Nigeria requires a more robust support of intervention.

Steps that can salvage the Naira

To the average Nigerian, if the Naira depreciated due to a CBN policy decision, why not reverse this policy and continue selling foreign currency to BDCs?

The issue with the aforementioned economic policy is that it is a temporary solution. According to CBN Governor Godwin Emefiele, Nigeria is the only nation that sells foreign currency from its external reserve to BDC.

He lamented that BDCs have strayed from their primary responsibilities and are now engaged in fraud and corruption in the nation.

Economic analysts such as Udegbunam praised the CBN’s policy and clarified that genuine economic diversification is the only path to economic recovery.

According to him, the federal government must encourage increased domestic production and exports in order to lower the country’s import rate.

Isaac Jacob, the chief financial officer of Crichweather, believes that the central bank should have considered the fragility of the Nigerian economy before eliminating BDCs.

According to him, prior to implementing the policy, the CBN should have guaranteed easy access to foreign exchange in commercial banks.

Alma Oputa, Partner at Avant-Garde Capital Ltd, remarked that the federal government could turn around the economy by making Nigeria more attractive to foreign investors.

According to analysts, the country ought to be more appealing to foreign investors in order to restore the value of the Naira.

According to a report from the NBS, foreign investments in Nigeria have been erratic over the past six years.

Recent events have demonstrated that Nigeria has much to gain from diversifying its economy, as the country’s high reliance on oil makes it susceptible to economic recession whenever the price of crude falls.

Between December 2016 and May 2017, when oil prices were as low as $35 per barrel, Nigeria’s external reserves increased by over 5 billion USD. Foreign direct investment enabled this to occur.

To prevent further depreciation of the Naira, Nigeria can adopt two important measures:

1. Reducing the demand for Forex

According to reports, petroleum products have the highest demand for foreign currency in Nigeria. According to Reuters, Nigeria spends $18 million per day on petroleum imports, or approximately $6.6 billion annually.

In addition, the CBN reported that Nigeria spent over 36 billion USD on petroleum imports between 2013 and 2017, indicating that establishing a local refinery in Nigeria could significantly reduce the demand for foreign exchange.

If Nigeria builds a local refinery capable of meeting its demand for petroleum products, it could save over 6 billion USD annually in foreign exchange.

2. Increasing exportation

As previously noted, Nigeria is an import-dependent nation. To reduce the nation’s reliance on imports, the federal government must encourage domestic production.

Increasing exports appears advantageous for the external reserve because it generates more foreign currency.

Final words

Changes in the Nigerian economy are only possible if leaders implement adaptive economic policies with courage.

The average Nigerian can do little or nothing to forestall the depreciation of the Naira. Dr. Omobola Adu, however, advised that the only method for average Nigerians to protect themselves from the falling Naira is to invest in other stable currencies.

According to him, many mutual funds offer dollar-based returns on investments. Nigerians are also advised to cease saving in the Naira and instead invest in stable currencies such as the U.S. dollar, the British pound, etc.

Facebook Comments Box

Leave a Comment