In 1973, when the naira was introduced as a legal tender to replace the British pound, N0.62 could buy one US dollar at Nigeria’s official foreign exchange market.
Compared with the current rate, the naira has depreciated significantly by eightfold (125,480.64 per cent) to N778.60 per dollar quoted on the website of the Central Bank of Nigeria (CBN) as of September 26, 2023.
The naira was introduced on January 1, 1973, replacing the pound at a rate of £1 = N2. The coins of the new currency were the first coins issued by an independent Nigeria, as all circulating coins of the Nigerian pound were struck by the colonial government of the Federation of Nigeria in 1959, with the name of Queen Elizabeth II on the obverse. This also made Nigeria the last country in the world to abandon the £sd currency system in favour of a decimal currency system.
On the parallel market, the naira has weakened to 1,000 per dollar as of September 28, 2023 from 160/$1 on May 14, 2013.
According to analysts, the naira depreciation has been attributed to inflation, economic mismanagement, and corruption.
“Demand for FX is higher than supply, and as long as this continues, the naira will keep getting weaker on the parallel,” said Yemi Kale, partner and chief economist at KPMG Nigeria.
He said the naira’s weakening in the official market will depend on the CBN policy to either prevent it from declining by force or allow it to be determined fully by market forces, which will follow the trend in the parallel market.
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On Tuesday, Olayemi Cardoso, the new CBN governor, said that his immediate priority would be to work out ways to clear huge FX obligations as part of measures to tackle the current naira downturn, which has become a huge burden for the economy.
Muda Yusuf, chief executive officer of the Centre for the Promotion of Private Enterprise, said restoring confidence in the FX market is the most urgent task before the new CBN governor.
“Cardoso is assuming the leadership of the CBN at a very crucial time in our economic history. There is a serious confidence crisis in the foreign exchange market fuelling an unprecedented speculative onslaught on the naira,” he said.
Yusuf said the economy is grappling with severe adverse effects of a depreciating exchange rate, soaring energy costs, ravaging inflationary pressures, a huge backlog of FX obligations that need to be cleared and debt service obligations that must be redeemed.
“Sadly, these outcomes manifest at a time when the country’s foreign reserves have been substantially encumbered,” he added.
Nigeria’s FX reserves, which give the CBN the firepower to defend the naira, have declined to $33.23 billion as of September 26, 2023.
This represents a 48.73 per cent decline when compared with $64.85 billion as of July 18, 2008, the highest level in the history of Nigeria.
The pressure on external reserves is largely as a result of high demand for foreign currency to meet goods imports and service payments, limited investment inflows due to weak confidence, and limited inflows from crude oil sales due to oil theft, according to a report by FSDH Research.
“Clearly, Nigeria does not have the luxury to defend the naira. Therefore, further exchange rate depreciation should be expected in the coming months,” analysts at FSDH Research said.
The report said the rising crude oil price raised concerns about the sustainability of fuel subsidy removal.
“With crude oil price approaching $100 per barrel, fuel subsidies are likely to return to prevent further increase in the price of petrol,” the report said.
On assumption of office on May 29, 2023, President Bola Tinubu, removed petrol subsidy as part of measures to revive the economy.
The Nigerian government removed the peg on the official exchange rate on June 14, 2023.
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“To win back investor’s confidence, we believe that the government must intensify its efforts in curtailing oil theft in the short term and provide a clear roadmap to improve FX inflows and management in the medium to long term to assure top institutional investors. In the immediate term, we expect the Naira to continue to face pressure in the official market,” the FSDH analysts said.
During the screening at the National Assembly, Cardoso outlined immediate or short-term measures towards addressing the problem of naira free-fall.
Cardoso said the second immediate measure would be to establish an open, transparent, ruled-based system.
According to the CBN, the FX market experienced a boom during the 1970s, and managing FX resources became necessary to ensure that shortages did not arise.
However, it was not until 1982 that comprehensive exchange controls were applied due to the FX crisis that set in that year. The increasing demand for FX at a time when the supply was shrinking encouraged the development of a flourishing parallel (black) market for foreign exchange, it said.
