The Nigerian currency, the naira, has continued to lose value against the US dollar despite a surge in foreign exchange supply. On Wednesday, the naira closed at N1,035.12 per dollar at the Nigerian Autonomous Foreign Exchange Market (NAFEM), a 4.50 percent depreciation from Tuesday’s rate of N990.62.
According to data from the FMDQ, the volume of FX transactions rose significantly to $85.68 million on Wednesday from $15.38 million recorded on Tuesday. However, this did not prevent the naira from weakening as demand for the greenback outstripped supply.
Why Is The Naira Falling?
The naira has been under pressure for several months due to a combination of factors, including low oil prices, dwindling foreign reserves, high inflation, and the impact of the coronavirus pandemic on the economy. The Central Bank of Nigeria (CBN) has tried to defend the naira by devaluing it twice in 2020 and introducing various policies to boost dollar liquidity and curb speculation. However, these measures have not been enough to stabilize the exchange rate, as the gap between the official and parallel market rates remains wide.
Some analysts have attributed the recent depreciation of the naira to the CBN’s decision to resume dollar sales to bureau de change (BDC) operators last week. The CBN had suspended the sales in March 2020 due to the lockdown imposed to contain the spread of COVID-19. Acccording to a report by Business Day, the resumption of the sales was meant to ease the pressure on the naira, but it seems to have had the opposite effect.
According to Lukman Otunuga, senior research analyst at FXTM, the resumption of dollar sales to BDCs may have triggered a speculative attack on the naira, as some market participants anticipated a further devaluation of the currency. “The naira’s outlook remains influenced by oil prices and the CBN’s ability to defend the currency. Given how oil prices remain depressed and the CBN’s foreign exchange reserves are hovering around $35 billion, the naira may be in store for more pain,” he said.
What Are The Implications of A Weak Naira?
A weak naira has negative consequences for the Nigerian economy, which relies heavily on imports for both consumption and production. A depreciating naira makes imports more expensive, which fuels inflation and erodes the purchasing power of consumers and businesses. Inflation in Nigeria hit a 30-month high of 13.22 percent in August, well above the CBN’s target range of 6-9 percent.
A weak naira also affects the external debt service of the country, which has increased significantly in recent years. According to the Debt Management Office, Nigeria’s external debt stood at $27.66 billion as of March 2020, of which 33 percent was denominated in US dollars. A falling naira means that the government has to spend more naira to repay its dollar-denominated debt, which could strain its already tight budget.
Furthermore, a weak naira could discourage foreign investors from investing in Nigeria, as they would face the risk of currency losses and capital flight. Foreign portfolio investors have been exiting the Nigerian market since the onset of the pandemic, due to the uncertainty and volatility in the exchange rate. The CBN’s governor, Godwin Emefiele, recently admitted that the country was facing a “dollar shortage” and appealed for patience from investors who were unable to repatriate their funds.
What Is The Way Forward for The Naira?
The naira’s fate depends largely on the recovery of the global economy and the oil market, which are the main sources of foreign exchange for Nigeria. A sustained rebound in oil prices and demand could boost the country’s export earnings and shore up its reserves, which could ease the pressure on the naira. However, the outlook for the oil market remains uncertain, as the resurgence of COVID-19 cases in some countries could dampen the prospects of a swift recovery.
In the meantime, the CBN may have to adopt a more flexible and market-driven exchange rate policy, as recommended by the International Monetary Fund and other experts. A unified and transparent exchange rate system could enhance confidence and credibility in the FX market, attract foreign inflows, and reduce the distortions and inefficiencies caused by multiple exchange rates. The CBN may also have to devalue the naira further to align it with the market realities and curb speculation.
However, devaluation alone is not enough to solve the naira’s woes. The government and the private sector need to work together to diversify the economy away from oil and promote non-oil exports, which could increase the supply of foreign exchange and reduce the dependence on imports. The government also needs to implement structural reforms to improve the business environment, enhance productivity, and stimulate growth. These are the long-term solutions that could restore the health and stability of the naira and the Nigerian economy.
