No doubt, 2023 and 2024 will go down in history as one of Nigeria’s most turbulent years on multiple fronts: exchange rate crisis, inflationary pressure, and other macroeconomic indices going south. But the most puzzling is the continuous downward tumbling of the value of the naira since the devaluation announcement by the PBAT administration at the assumption of office in May 2023. In July 2023, the Central Bank authority, under the leadership of Folashodun Shonubi, announced the collapse of all foreign exchange (FX) segments into the Investors and Exporters (I&E) windows and the re-introduction of “willing-buyer-willing-seller” models, amongst other rafts of FX reforms.
The announcement in its basic terms implied the shifting of gears in Nigeria’s FX management system to a “crawling peg”—which better reflects the twin dynamics of demand and supply—than the “managed float” system previously holding sway in the nation. On the heels of this development, the CBN official FX rate fell by 29 percent on June 14, 2023, to N660.04 per dollar, narrowing the gap between the official rate and parallel market rate by N92.00 from N283.33 the day prior. By June 2023, the differential between the official and parallel market rates had shrunk to N2.75—a level last seen in the pre-pandemic era.
The naira, Nigeria’s national currency, has been at the centre of economic debate for years due to its persistent depreciation. To salvage the situation, the CBN activated myriads of well-coordinated demand and supply side policies since the turn of the year. In a similar vein, several reforms have been initiated—even though yet to be fully implemented—by the fiscal authorities and are also aimed at stabilising the currency. Yet, the question remains: are these measures enough to signal a turning point, or is the battle for the value of the naira far from over? Put in other words: is stabilising the value of the naira amidst the threat of the value thief being achieved, or are there potential silver linings in the envisioned future trajectory of the naira?
Read also: Why rising external reserves fail to stabilise Naira
Causes of the naira decline
The naira, once an envy of other nations, has experienced a significant decline in recent years with its value tumbling and plummeting to record levels, leading to increased inflation, reduced purchasing power, and economic uncertainty. As the lifeblood of the country’s financial system, the stability of the naira is crucial for economic growth, trade, and overall prosperity. However, a combination of factors—including overreliance on oil revenues, inconsistent fiscal policies, and global economic pressures—has led to its continued weakening. Moreso, the economy has been characterised by mismanagement, corruption, inefficiencies, and deliberate intent to batter the physical and face value of the currency by Nigerians occasioned by spraying at parties, marching on the currency, and deliberate hoarding of newly minted notes for rent-seeking motives.
Tellingly, Nigeria’s economy has long been heavily dependent on crude oil exports, with oil accounting for over 90 percent of the country’s foreign exchange earnings. This overreliance has made the economy and the naira highly susceptible to global oil price fluctuations. When oil prices are high, Nigeria’s foreign reserves increase, stabilising the naira. However, during periods of oil price crashes—such as the global oil slump in 2014, the pandemic-induced crash in 2020, and the geo-political uncertainties triggered by Europe and the Middle East in 2021 and 2023—the country’s earnings drastically declined, resulting in forex shortages and putting immense pressure on the naira.
In a similar vein, Naira’s depreciation has been attributed to the chronic scarcity of FOREX. Successive administrations have struggled to maintain a steady supply of dollars, euros, and other major currencies, which are vital for imports and foreign investment. The CBN has implemented various measures, including multiple exchange rates and capital controls, to address forex shortages. However, policy mismanagement—such as delayed responses to economic crises and a lack of coherence in currency regulation—has exacerbated the problem, further devaluing the Naira in both the official and parallel markets.
Finally, inflationary pressures and mounting external debt profiles have contributed significantly to the declining value of the naira. Persistent inflation, occasioned by climbing food prices, skyrocketing energy costs, and currency floatation, has eroded the purchasing power of the naira. As of 2023, Nigeria’s external debt reached unprecedented levels, necessitating large-scale foreign currency repayments, further straining the country’s foreign reserves and fuelling Naira depreciation.
These historical factors have collectively shaped the naira’s downward trajectory, making its recovery a critical priority in Nigeria’s economic reform agenda.
Approaches to strengthening the value of the naira
However, more than a year since PBAT rolled out its raft of reforms, the naira, and by extension the economy, is yet to turn a corner. On the one hand, the slack in progress can be attributed to the natural time lag required for policy reforms to take effect, while on the other hand, the weak institutional capacity, together with the economic sabotage tendencies of many Nigerians, undermining whatever efforts are being made to stabilise and strengthen the value of the national asset.
But crucially, the delay that greeted the appointment of cabinet members—as it took the President circa 90 days to form his cabinet—coupled with the fuzzy communication tilt of Mr Cardoso’s stand in the first two months of his tenure—capitulated the FX market into overdrive—with speculative activities permeating the market. More specifically, the official and parallel market rates, which closed the month of June at N762.9/US$ and N772/US$, respectively, weakened to N813.67/US$ and N1150/US$ (differential: average of N336.33) by November 23, 2023, a day before the announcement of monetary policy reset by Mr. Olayemi Cardoso. By the time the Cardoso-led Monetary Policy Committee (MPC) would convene for its two-day first meeting on February 25-26, 2024, the rate had weakened to record levels of N1665.50 and N1830.00, respectively. Additional pressure points on the FX dynamics and, by extension, Nigeria’s FX reserves are attributable to dwindling total direct remittance inflow (Q12024: US$ 282.6 vs. Q4’ 2023: US$ 301.m), low oil production level (Q22023: 1.7 mbpd vs. 1.53 mbpd in Q12023), settlement of FX backlogs (with about US$7.0 settled between November 2024 and August 2024), and stagnated foreign investment flow (Q42023: US$1.7bn as against US$2.2 in Q4’2022).
BDI commentaries: Solutions and strategies
While we commend the Central Bank of Nigeria (CBN) for its efforts to address the foreign exchange (FX) crisis, its limited ability to influence supply-side factors remains a critical gap in Nigeria’s FX strategy. Historically, Nigeria’s FX reserves have heavily relied on net inflows from crude oil and gas exports, along with remittances and portfolio investments. However, since the decline in oil and gas revenues in 2015, the CBN’s capacity to adequately supply the FX market has diminished. Furthermore, the implementation of fiscal policies aimed at enhancing local production—particularly for non-oil exports—has been subpar, leading to a persistent increase in demand for imported goods and services.
Read also: FX market turnover hits six-month high of $616.73m as naira loses
Major policy actions taken by the Cardoso-led CBN, the preliminary impacts, and our insights to optimise future actions are captured in the matrix below:
Cardoso’s FX-Policy blueprint
Tellingly, we have seen that standalone, the policies (i-v) above have only delivered short-term relief on the FX debacle. The market has hovered between N1600 and N1700 on the NAFEM and NAFEX, respectively. We advocate that for the FX market to experience sustainable tranquillity and calm, first traditional FX sources—such as oil production, remittances, and foreign portfolio investment—must be revitalised by supportive policies such as security of oil assets, elimination of multiple taxation, and incentivising diaspora to remit through official channels. Others include the introduction of a project-tied diaspora bond, improved transparency rating, and elimination of policy impediments in the business environment.
Additionally, potential alternate sources of FX, such as sales of followed assets, non-oil output, and talent exports, should be given priority attention through appropriate monetary, fiscal, and trade policy support to deliver longer-term objectives. For extended short-term relief, we apotheosised the option of bilateral loans, natural-resources-tied-loans, debt-for-nature swaps, asset concessions, and financialisation.
We also advised that, henceforth, CBN needed to look at the sequencing pattern of policy roll-out. Before CBN embarked on several FX and naira stability reforms, a lot of housekeeping needed to have been put forward by the apex authority, which would have given the naira-strengthening effort an accelerated flight when it is eventually rolled out.
Lastly, to resolve these ongoing FX crises and defend the face and intrinsic value of the naira, it is imperative to effectively execute fiscal reforms that address key challenges such as insecurity, poor infrastructure, an unfriendly business environment, and a weak legal system. Only by tackling these foundational issues can the CBN hope to achieve sustainable solutions to Nigeria’s FX problems.
Join BusinessDay whatsapp Channel, to stay up to date
Open In Whatsapp
