The Nigerian naira now exchanges for a dollar at a ridiculously low rate of N715/$1. Sadly, this slump in the value of the naira didn’t come as much surprise as the currency has been depreciating steadily in the black market whilst maintaining a record low in the official Investors’ and Exporters’ Window.
As of the time of this writing, the local currency lost 0.42 percent of its value compared to N712 per dollar which it traded for on Friday.
At this historic low exchange rate, the naira has depreciated by a whopping 26.5 percent year-to-date. Interestingly, the naira also raced to a record low of N436 in the official Investors and Exporters Window for over two weeks now.
Naira has taken a nosedive due to an appreciating strong dollar, high level of import demand, currency speculation, and weak productivity, according to analysts.
Notably, the appreciating dollar is having a huge impact on the naira. Considering that the greenback (dollar) is the currency used mostly in international trade, its appreciation is increasing the costs (in naira terms) of dollar-denominated transactions and translating to a rising cost of importation and subsidies.
Also, as the US Federal Reserve resorted to hawkish interest rate hikes, the naira and other major currencies of the world have since been under massive pressure and this may cause Nigeria’s Central Bank to jack-up monetary policy rate.
This currency pressure in Nigeria poses a conundrum because of the growth impact of a further interest rate hike which the central bank will most likely implement in defending the naira. Additionally, there are debt and international trade implications of a weakening naira amid a strong, rising dollar.
In practice, Nigeria will need to raise its interest rate in line with the fed interest rate hike in the US, to defend the naira and remain attractive to foreign investors. Whereas interest rate hike will increase the cost of domestic borrowing in Nigeria and constrict the economy of Africa’s giant.
According to the Debt Management Office of Nigeria’s (DMO) recent report, the total external debt stock of Nigeria stands at USD40.06 billion (N16.61 trillion) as of June 30, 2022. With a weakening naira relative to the dollar, the repayment of this debt obligation will become more expensive and could result in what–in public lingo–is called the “original sin.”
For an import economy like Nigeria, a weak naira will weigh significantly on trade as import will become more expensive (in naira terms).
Nevertheless, Nigeria can leverage this opportunity to increase its export earnings. This is because a weak naira relative to the dollar means the country’s export will become cheaper, presenting the opportunity for a windfall gain for Nigeria.
Leave a Reply