The nation’s currency, the naira, is facing serious pressure from all directions. From unbridled imports to low crude oil exports, the naira is not getting the support it deserves.
Another pressure point is the electioneering period that is getting more intense by the day. In the last few days, political aspirants were said to have given delegates the almighty dollars. This must have compounded the current problems of the naira.
Investors, businessmen, tourists, and other users who need it for their legitimate business activities are the ones bearing the brunt of this worsening naira. Some have postponed their investment plans, while others may have cancelled outright their projects in view the off-dollar scarcity.
In some of the interactions we had with manufacturers, they complained bitterly about how the plummeting exchange rates affected their planning, and put them in a difficult situation
One of the sources of the US dollar to the Nigerian economy is on the platform of exports. It should be noted that the Nigeria’s trade balance stood at N2.23 trillion in 2019 as a result of the annual imports of N16.95 trillion compared with the exports of N19.19 trillion. On the export side, crude oil dominated while on the import side, the purchases of refined petroleum products, industrial raw materials and food items dominated the list.
In 2020, exports plummeted. Nigeria ended that year with a negative trade balance of N178.26 billion. The situation got worse in 2021 as the nation’s negative trade balance rose to N1.94 trillion. Specifically, from January to March 2021, and from June to November of the same year, monthly negative trade balance rose from N63.6 billion to N873.01 billion.
Momentarily, Nigeria has recorded a positive trade balance in the first quarter of 2022. But this has not saved the naira. This is because the other complementary sources of the dollar are not living up to expectations. Capital importation is dwindling just as the desires of Nigerians to preserve their wealth in US dollars is gaining more traction among the political and economic elites.
Capital importation declined by 17.5 percent to $1.57 billion at the end of first quarter of 2022 on a year-on-year basis. The declining trend has been there since 2014, when capital importation peaked at $20.75 billion. From 2015 to 2018, the highest capital importation was $16.81 billion. A momentary relief was received in 2019 with the importation of $23.99 billion. Thereafter, capital importation has continued to nose-dive.
This investment inflow outlet is another means of providing relief to the naira as it gives the Central Bank of Nigeria (CBN) the requisite flexibility to meet the foreign exchange needs of businesses and other legitimate users.
Another investment that declines while the naira is plummeting is the foreign participation in equity trading as this relates to the nation’s capital market. At the moment, local investors have become the largest owners of most of the listed equities in Nigeria.
For instance, in 2021, foreign investors controlled only 21.3 percent of the equity trading on the Nigerian Exchange. Also, as of April 2022, foreign investors controlled only 17.4 percent, much lower than the level it was in the previous year.
The above has confirmed the general belief that the sources of foreign exchange into Nigeria, which could provide succour to the Nigerian currency are drying up. This is the reason why the naira keeps plummeting against other major currencies.
For Nigeria to grow, the exchange rate must stabilise. The current situation has already affected Nigerian manufacturers significantly. For instance, how do manufacturers who import raw materials plan in a regime of volatile exchange rates? In some of the interactions we had with manufacturers, they complained bitterly about how the plummeting exchange rates affected their planning, and put them in a difficult situation.
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It is more worrisome to them because not all the costs incurred could be transferred to the final consumers. The situation has ensured that most made-in-Nigeria products are not competitive in the international market.
The highly expensive political system Nigeria operates is not helping the naira. For instance, presidential aspirants under the ruling All Progressives Congress (APC) paid a minimum of N100 million to obtain the party’s presidential form. The opposition People’s Democratic Party (PDP) paid N40 million. At the just concluded PDP convention, it was reported that delegates were paid in the dollars.
Meanwhile, the electioneering period has just begun, and now the naira is exchanged for N600/$ at the parallel market. Evidently, more money will still be injected into the political space in an election season like this. Therefore, there is no certainty that the exchange rate will not depreciate further.
Pressures on the naira are coming from many sources. Consequently, all of them require the urgent attention of government and the CBN. Nigeria must devise means to have value-added exports that will not be subject to the treatments currently meted out to agricultural produce at the international market.
The concerns that make capital importation to dwindle must be addressed. Also, ways must be devised to attract foreign investors into the nation’s capital market. The problem requires a multi-pronged solution, and it is achievable if more seriousness is attached to it.
