Behind the scenes of Nigeria’s currency crisis: Quick fixes and bold decisions

In the wake of June 2023’s monumental devaluation of the Naira by the Central Bank of Nigeria (CBN), the currency crisis has unfolded with unexpected intricacies. The initial optimism surrounding President Bola Tinubu’s reforms to the foreign exchange (FX) market, which aimed to bridge the gap between the Official and Parallel exchange rates, has given way to a complex economic scenario. Despite the intent to attract foreign investment and implement a “Willing Buyer, Willing Seller” model, reality paints a different picture.

In the subsequent months, the parallel rate has surged past 1,300, while the official rate hovers around 800. This alarming disparity demands swift action from the government and CBN. The lack of significant Portfolio or Direct Investment (FPI/FDI) exacerbates the challenges, with FDI inflows plummeting below net zero in 2022, and FPI dwindling from $1.5 billion quarterly to near zero.

While there is no evidence of immediate public unrest, the patience of Nigerian citizens is wearing thin. The combination of higher fuel prices, minimal fiscal reinvestment, and rapid currency depreciation creates a precarious situation. President Tinubu, who garnered immense enthusiasm during his election, faces the critical task of steering the country toward economic recovery.

Verto, a key player in this FX and cross-border payments market, regularly provides insights into Nigeria’s economic landscape. In response to the crisis, the Presidential Fiscal Policy and Tax Reform Committee presented 20 “quick wins” to President Tinubu, addressing economic challenges over the next 12 months. In this editorial, we scrutinise and provide recommendations on select quick wins aimed at curbing Naira depreciation.

Quick Win 1: Comprehensive review of tariffs on the 43 items unbanned from accessing forex

Verdict: Backward step

The removal of the 43-Item Rule initially signalled a positive shift toward genuine FX reform. Re-banning these items, however, risks undermining confidence in the government’s commitment to transparency. A more nuanced approach, such as reviewing the list and imposing additional tariffs selectively, could generate fiscal inflows without overwhelming the Naira.

Quick Win 2: Digitalise Nigeria’s FX regime to discourage speculative demands and hoarding of FX in cash

Verdict: Positive

The move to digital platforms is a progressive step, fostering transparency and reducing the incentive for speculation. The cautionary note lies in ensuring the platforms are secure and not vulnerable to manipulation or cryptocurrency exchange. The recent Renewed Hope Conditional Cash Transfer project, while well-intentioned, inadvertently fuelled currency depreciation. A seamless digital option can mitigate such unintended consequences.

Quick Win 3: Expand the official foreign exchange market to incorporate BDCs, forex apps, and retail FX dealers

Verdict: Necessity

Incorporating various players into the official foreign exchange market aligns with the goal of a “Willing Buyer, Willing Seller” model. However, outlawing transactions in the black market entirely may be impractical. The emphasis should be on making the official window attractive and super-liquid, deterring participation in the parallel market.

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Quick Win 4: Grant waiver of penalty and interests on outstanding tax liabilities

Verdict: Good intentions

While the waiver may boost tax receipts temporarily, it poses risks to the economy by increasing spending power and fuelling the bid for hard currency. Encouraging tax compliance through alternative measures, such as restricting access to the official FX market for tax evaders, may strike a better balance.

In conclusion, the key to Nigeria’s economic recovery lies in addressing the liquidity issue. While implementing stringent measures may be politically challenging, the potential long-term benefits are substantial. President Tinubu’s ability to make difficult decisions, coupled with comprehensive FX reforms, will determine Nigeria’s economic trajectory. It is a delicate balancing act between short-term political expediency and long-term economic prosperity, and the time for decisive action is now.