The rate at which the naira exchanges for the dollar is ridiculously low, reaching historic falls in the black market and the official Investors and Exporters (I&E) Window. As of this writing, the exchange rate at the I&E window stands at N439.17/$1, according to FMDQ exchange, while the black market rate hovers around N730/$1.
Although the dollar has strengthened significantly this year relative to many major currencies–the dollar is now more valuable than the Euro and also giving the pound sterling a hot chase–the decrease in forex inflows from Nigeria’s major sources has exacerbated the pressure on the naira.
The consistent decline in Nigeria’s forex earnings has made it difficult for the Central Bank of Nigeria (CBN) to sell the dollar at about N430, the rate at which it wants to peg its local currency to the dollar. This has consequently resulted in a widened gap between the black market and the I&E window rates. Currently, the exchange rate premium in the parallel (black) market is about N290. arbitrage, heavy speculation
According to data from Financial Derivatives Company, the inflow of dollars into Nigeria has declined across all major sources; oil revenue; non-oil export; foreign direct investment; foreign portfolio investment; diaspora remittances.
Oil revenue, the major source of forex earnings, has been significantly hampered by low oil production and theft. Oil production is down to 1.1mbpd below the OPEC production quota of 1.8mbpd, with oil theft estimated at 400,000bpd. This has led to a loss of forex inflow to the tune of $1 billion in the first quarter of 2022, according to NNPC.
Non-oil exports have also dropped. It contracted by 5.61% to $675.08 million in the second quarter from a value of 957.56% million in the first quarter. Foreign Direct Investment declined by 5.02% in the second quarter of 2022 to $147.16 million from $154.97 million in Q1.
Foreign Portfolio Investment declined significantly. This source of forex inflow fell by 20.91% to $757.32 million in the second quarter of 2022 from $957 million. Similarly, diaspora remittances declined due to increased leakages through unofficial channels.
The CBN Economic Report shows that the aggregate foreign inflow into the economy for May 2022 declined by 17.3% to US$5.42 billion compared with US$6.56 billion in April. This value was US$20.58 billion in Q4 2021. For the same period, foreign exchange inflow through the Bank decreased by 14.2 percent to US$2.12 billion from US$2.47 billion in the preceding month, largely attributed to a 47.2 percent decline in crude oil export receipts.
This development has increased the pressure on the naira as the heavy demand for the greenback is not complemented by sufficient forex earnings. There is an urgency for the CBN to increase its forex earnings. As such, favorable policies and strategies need to be adopted to remedy this situation.
