The continued depreciation of the Naira has been a pressing concern for both the government and ordinary Nigerians. The sharp depreciation of the naira over the past four months has raised many questions, particularly regarding the rapid rise in the exchange rate of the U.S. dollar.
As of Friday last week, the naira had fallen in value to almost N830/$1. On the parallel market, it had fallen to more than N1,300/$1. And there seems to be no letup in the downward slide of the local currency.
Some analysts posit that if the government does not come up with thrombosis, and the naira continues to fall at its current rate, it may exchange for at least N2,000/$1 by December.
To understand this depreciation, it is essential to dissect the multifaceted factors that have led to this ongoing trend.
First and foremost, the declining supply of foreign exchange is at the heart of the naira’s depreciation. The demand for U.S. dollars remains high in Nigeria due to the country’s dependence on imported goods for various economic activities. This surge in demand contrasts with the dwindling supply of dollars, as reflected in the persistent fall of the nation’s external reserves. These reserves, which represent the country’s ability to engage in international trade and transactions, have been steadily decreasing, a worrisome sign of a dwindling supply of foreign exchange.
While official sources claim the country’s foreign reserves stand at circa $34 billion, JP Morgan claimed in August that it might be as low as below $5b billion.
Foreign exchange inflow into Nigeria, a significant source of supply, has also been dwindling. Net Forex Inflow, a crucial indicator of this inflow and outflow, has been steadily declining since 2019, largely due to the fall in foreign investment into the country. This decline is alarming, with a 77.8 per cent decrease in Capital Importation between 2019 and 2022, reflecting the dire state of foreign exchange supply.
The situation is compounded by the new operational measures introduced by the Central Bank of Nigeria (CBN) on June 14. The elimination of multiple exchange rates and the adoption of the “willing buyer willing seller” model aimed to create transparency in the forex market and encourage inflow, particularly foreign investment. While these measures hold the promise of a more stable and transparent market, the immediate effect has been a surge in the exchange rate.
The result of these factors is an acute scarcity of U.S. dollars, causing their price to rise in relation to the naira. This phenomenon, like any other commodity, is dictated by the simple law of supply and demand. As long as demand for foreign exchange remains high and supply remains limited, the exchange rate will continue to climb.
The ongoing trend of naira depreciation also has significant consequences for the economy. It leads to an increase in the prices of imported goods and services, subsequently driving up inflation rates. This, in turn, erodes the purchasing power of the naira, making it a less attractive currency to hold. Furthermore, the fall in foreign exchange reserves, especially during periods of low oil prices, limits the Central Bank’s ability to defend the naira, exacerbating the depreciation.
Commenting, the CEO of the Center for the Promotion of Private Enterprise(CPPE), Dr. Muda Yusuf, acceded that there is a serious confidence crisis in the foreign exchange market fueling an unprecedented speculative onslaught on the naira. He said the economy is grappling with severe adverse effects of the depreciating exchange rate, soaring energy costs, ravaging inflationary pressures, a huge backlog of foreign exchange obligations that need to be cleared, and debt service obligations that need to be redeemed. “Sadly, these outcomes are manifesting at a time when the country’s foreign reserves have been substantially encumbered. Meanwhile, the CBN must ensure strategic and transparent intervention in the forex market to minimise volatility, as far as the reserves can support,” he said.
He added that in addition to the I and E window, it has become necessary to create an autonomous window in the banking system where the currency can trade freely without any encumbrances. “This is necessary to avert the diversion of remittances to other jurisdictions or the black market. We cannot afford to live in denial at this time.
“The clearance of the backlog of forex obligations should be accorded high priority to restore the confidence of domestic and foreign investors,” Yusuf said.
He noted that the naira’s depreciation is a complex issue driven by a confluence of factors. He stated that while the government’s recent efforts to unify exchange rates and enhance transparency in the forex market may offer hope for a more stable naira in the long run, the immediate future may see continued depreciation.
“The situation underscores the need for measures to boost foreign exchange supply, attract foreign investment, and reduce the backlog of unmet forex demand. If these factors are addressed effectively, there is a possibility that the naira may stabilise and even appreciate in the future, as seen in the past during the convergence of official and parallel market rates. However, the path to currency stability in Nigeria remains uncertain and challenging, requiring careful management and a comprehensive approach to address the root causes of naira depreciation.
“The economic management orthodoxy of market forces is being called to question in the light of the social outcomes of the market-oriented reforms. There is a measured re-emergence of political economy with the reappearance of fuel subsidies and divergence in exchange rates. This is evidently an economic management quandary that the new economic team would have to manage, and urgently too. And the CBN has a key role to play in this,” he stated.
In a statement accredited to a former deputy governor of the Central Bank of Nigeria (CBN), Kingsley Moghalu, the only way to fix the naira is for the Nigerian economy to become productive and export-driven. He also noted that that would be a long-term solution.
Also speaking, a financial economist at Nnamdi Azikiwe University, Dr. Felix Echekoba, said Nigeria must produce to reduce imports and increase exports to turn around the tide of depreciation of the naira. He cited that the agriculture sector is of especial interest because whereas Nigeria has fertile and arable land in abundance, the country remains a huge net importer of food.
“Do you know that some people import bread from the United Kingdom and France into this country every day,” snapped another economist, Dr. Moses Ojake. Ojake stated that Nigeria’s net export is higher than its net import and deduced that there should not be so much pressure on the naira.
He, however, stated that non-economic actors who have no business accessing foreign currencies have free access and misuse them, to the detriment of the larger economy.
