The naira has been under massive pressure for the past two weeks, falling from an average of N614 per dollar recorded two weeks ago. Despite a downswing to N680/$ as of the beginning of trading activities on Wednesday, the naira breaks into a record-low, passing the N700/$ threshold to exchange for N710/$.
This downturn in the value of the naira is at a huge cost to the Nigerian economy as constant depreciation of the country’s currency is affecting livelihood and businesses.
Clearly, Nigeria is in a foreign exchange crisis as it is facing a sharp decline in the value of its currency. This notorious depreciation in the value of the naira in the parallel market is raising confusion and tension about the direction of the economy of Africa’s giant for the rest of 2022.
The consistent fall in the value of the naira cannot be disassociated from the fact that Nigeria is an import-based economy. The nature of foreign exchange being price-based makes exchange rates highly responsive to the interaction of demand and supply. For an import-dependent country like Nigeria where import bills surpass the foreign exchange earnings, there will be pressure on the local currency (naira) against the foreign currency (dollar) for which most of the trade is denominated in.
The CBN has maintained a managed float foreign exchange regime where it intervenes in the market to stabilize the value of the naira and to also cushion supply shocks of the dollar.
The CBN has made a very commendable move in generating non-oil revenue. In February 2022, the CBN and the Bankers’ Committee unveiled the RT200 program, a set of plans, policies, and programs designed to increase the nation’s earnings exclusively from non-oil exports to US$200 billion in FX repatriation, within the next five years. The RT200 program will be implemented through five anchors: Value Adding Exports Facility (VEF); Non-Oil Commodities Expansion Facility (NCEF); Non-Oil FX Rebate Scheme (NFRS); Dedicated Non-Oil Export Terminal; and the hosting of a Bi-annual Non-Oil Export Summit.
However, the CBN’s constant intervention in the market has had little or no impact on the depreciating naira.
What are analysts saying?
Over the years the CBN has taken measures to avoid the free-fall of the naira but this has yielded little result. it prohibited the sale of FX to Bureau de change operators but the naira continues to plummet.
A Lagos-based investment practitioner stated that the exchange rate problem in Nigeria is a supply-side problem, noting that the government is not earning enough foreign exchange to service the demand for dollars by businesses and individuals. He noted that the government is rather exerting more control on the demand for the greenback, with interventions and restrictions to cut back on the demand for dollar.
He said “the government should focus on supply-side intervention. The CBN‘s effort should be channeled toward generating more non-oil foreign exchange.”
“Investors do not like the overbearing presence of the regulators in the foreign exchange market. Government’s overbearing presence in the foreign exchange market is chasing away investors.”
He also stated that for an information-sensitive foreign exchange market, comments of the Apex Bank will trigger perceptions in people and investors, thereby making them take actions that can affect the market — the CBN governor, Godwin Emefiele, recently said that Nigerians who use naira to buy dollar will be arrested.
Professor Ken Ife, a Macroeconomic and Public Policy Analyst, in an interview with TVC News, stated that the exchange rate crisis is a revenue problem and that a lot of pressure is on the government to raise non-oil revenue. He stated that foreign direct investment and foreign portfolio investment that used to rake-in dollars to the tune of $8 to $10 billion have crashed.
He stated that “there is high speculation in the economy as people are expecting the naira to drop further. This speculation makes people buy and hold dollars with the hope to sell when naira falls, to make a huge profit”.
“Insecurity is playing its part in affecting the structural economics of the country and then depressing investment as foreign investors are not bringing their dollar.”
