The naira has depreciated against the US dollar by 69.47 percent under the current administration led by President Bola Ahmed Tinubu amid the implementation of foreign exchange reforms.
Data collated from the FMDQ Securities Exchange revealed that naira has weakened to N1,537.96/$1 currently from N469.50/$ as of June 8, 2023 before the unification of the FX markets.
The pressure on the FX market climaxed on Friday as the naira fell to an all-time low of N1,537.96 per one dollar at the official market and is seen to remain weaker this week despite the Central Bank of Nigeria’s (CBN) interventions in the market.
At the close of business on Friday, the naira fell to a record low of N1,650 per dollar at the parallel market, also known as black market, due to strong demand for the greenback amid scarcity.
Following the shortage of the dollar liquidity in the FX market, the naira is expected to remain weak, said Abiodun Keripe, managing director at Afrinvest Research and Consulting.
In the last 10 years, the country’s currency has depreciated by 89.73 percent at the official market and has continued to weaken against the US dollars, resulting in rising inflation, erosion of purchasing power, reduced investment and pressure on businesses.
One dollar was quoted at N1,517.20 (CBN rate) as of February 14, 2024, weaker than N155.75 on February 14, 2014, data from the central bank showed.
The country’s external reserves, which give the CBN the firepower to defend the naira, have also declined in the past 10 years by 6.35 percent following low foreign exchange earnings due to volatility in oil prices and strong demand for FX, among other reasons.
Data from the CBN revealed that Nigeria’s foreign currency reserves declined to $33.17 billion as of February 13, 2024 from $35.42 billion recorded on February 13, 2014.
Also, in the last 10 years, the price of crude oil dropped by 21.16 percent to $86.98 per barrel as at February 13, 2024 compared to $110.32 per barrel in February 13, 2014, data from the CBN website indicated.
Nigeria heavily relies on oil exports for foreign exchange earnings.
“The naira is about the cheapest I’ve seen it in 15 years; so this is one of those times that people tend to do better selling dollars for naira (and investing in a real asset) – rather than the opposite. The currency weakness we’ve seen over the past year was the inevitable result of the policies pursued up to mid-2023,” Charlie Robertson, head of macro strategy at FIM Partners UK Ltd, said in an emailed response to BusinessDay.
“The persistent weakening of the naira against the dollar is fuelled by multiple factors. Import reliance: Our heavy dependence on imported goods puts immense pressure on our foreign exchange reserves, contributing to currency instability,” Mercy Okon, a research analyst at Parthian Securities, said.
“Nigeria’s export base remains narrow, leaving us vulnerable to fluctuations in global commodity prices. Diversifying exports and revitalising domestic production sectors are crucial to stabilise the naira.”
According to her, strengthening the naira requires both addressing import dependence and boosting exports through targeted reforms and investments.
Muda Yusuf, chief executive officer of the Centre for the Promotion of Private Enterprise, attributed the persistent depreciation of the local currency to the quality of macroeconomic management, saying that when the quality of macroeconomic management is cumulatively poor, it manifests in the economy.
He said fiscal deficit over the years is a major factor and that money supply over the years without commensurate with the GDP is another factor.
“Nigeria is highly import-dependent generating pressure for FX in the manufacturing sector. There is too much pressure on our reserves and our reserves cannot sustain it. Progressively, reserves were getting weaker and the demand for forex was getting higher,” Yusuf said.
He said the rate of printing money was growing, especially in the last 10 years. “The CBN was printing money and that also is a major factor.”
Money supply, known as M2, increased by 48.25 percent year-on-year to N78.32 trillion as of December 2023 from N52.83 trillion in the same year, according to the CBN.
Money supply refers to the total amount of money circulating in an economy. It includes physical currency (like coins and banknotes) and various types of deposits in banks that can be quickly converted to cash.
“We have hope for the naira but it is just that it will take time to fix. A lot of factors that I have mentioned are attitudinal and a lot are structural. We cannot have a quick fix for those things. It takes time to build competitiveness in the economy. It takes time to change attitudes, particularly, people in the bureaucracy and political class, but it can be corrected,” he said.
The Nigerian Economic Summit Group, said in its 2024 outlook report that an anticipated increase in local crude oil production and a favourable global oil price outlook will sustain the trade surplus and accelerate growth in the country’s external reserves.
The report said limited CBN’s intervention in the FX market is projected to foster an increase in foreign reserves to approximately $40.0 billion by the close of 2024.
“Consequently, the official exchange rate is expected to reach N900/$, signalling a positive trajectory. Likewise, amelioration in FX shortages is expected to stabilise the operations of the black market, where the exchange rate will exhibit relative stability and depreciate at a slower pace compared to the fluctuations experienced in 2023.”
Among other FX policies adjusted by the CBN in the last two weeks was the stopping of the payment of Basic Travel Allowance (BTA) and Personal Travel Allowance (PTA) in cash dollars.
This is in a bid to promote transparency and stability in the FX market while preventing malpractices.
Referencing memorandum 8 of the foreign exchange manual and circular FMD/DIR/CIR/GEN/08/003 dated February 20, 2017, the CBN’s trade and exchange department outlined the eligibility criteria for accessing PTA/BTA.
Effective immediately, all authorised dealer banks are mandated to process pay-outs of PTA/BTA exclusively through electronic channels, which include debit or credit cards.
The traditional method of cash disbursement for these allowances is no longer permissible, the circular said.
The directive, signed by Hassan Mahmud, director of the trade and exchange department, underscored the CBN’s commitment to enhancing accountability and efficiency within the foreign exchange market.
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