Nigerian economy: Why the Naira is failing
The Nigerian Naira has been on a depreciating path since the country's inception. Here is a comprehensive analysis of why the Naira is failing and how to save the Naira.
The Naira has been on a roller coaster ride in the past few months. In September 2021, Naira depreciated to N545 against 1 USD in the black market. By the end of the market on October 21, 2022, Naira was trading at N751/$1 on the black market. On the other hand, the gap between the parallel and official rate has been disheartening; the difference is more than N200, which is why Naira closed at N437.28/$1 (official rate) on October 20, 2021.
The above figures and pressure on the Naira can easily be traced to the new CBN policy that stalls the remittance of Forex to Burea De Change (BDC) merchants—ensuring that Banks are the primary retailers of forex. This singular action, coined with other factors, has seen the steep fall of the Nigerian Naira.
The question is, why has the Naira been failing? This happens both in periods of economic prosperity and recession, so what is the underlying problem of the Naira?
This article seeks to answer the above questions and highlight the real issue behind the rise and fall of the Naira.
Nigeria prime minister Tafawa Balewa with other dignitaries in the signing ceremony during independence.
History of the rise and fall of the Naira
The importance of history cannot be over-emphasized; there is a need to evaluate history to find the root causes of problems. The history of the Naira in the Nigerian economy plays an integral role in answering why the Nigerian Naira is failing.
It all started In January 1973, when the Naira replaced the Nigerian pound and was pegged at N1 to 10 Uk Shillings; it also sold at N1 to 0.62 USD.
Fast-forward to 1985, when the Babaginda military regime took over the reins of government and pursued a neoliberal structural adjustment program that dealt a heavy blow to the Nigerian economy and saw the devaluation of the Naira to 1.75 USD. By 1993 when Babaginda left office, the Naira was trading at N22 per dollar.
The story never got better because, from 1999, the Naira was N92.34 to $1, further falling to N132.89 in 2004. After the election handover in May 2015, the Naira sold at N198.914 to $1. By 2018, Nigeria saw Naira fall further to N306.08 per dollar before reaching its current rate in 2022.
These data show that the Naira problem did not start today; it pre-existed before the current government.
The problem with the Nigerian Naira
Nigeria is dealing with an economic crisis, but the most obvious is the Naira depreciation. Since the central bank of Nigeria (CBN) banned the sale of foreign exchange to BDC, Naira has fallen from N505/$1 to N751/$1 in the black market (as of press time).
The central bank implemented the same policy in 2017, which saw the Naira fall from N405 per 1 USD to N500/$1. The CBN then changed its policy to encourage more liquidity into the economy and brought the Naira back to N365 per dollar.
Some analysts believe that the recent move by the apex bank was to stave off speculators who practice the infamous 'pump and dump' of the Naira.
Dumebi Udegbunam, a fixed trader in UBA, told Nairametrics that the primary cause of the fervent Naira depreciation is Demand and Supply. He noted that Nigeria is an import-dependent country; thus, it sends out more foreign exchange (Forex) than it receives.
Recent reports from the National Bureau of Statistics (NBS) show that Nigeria recorded a trade deficit of N1.9 trillion in the second quarter of 2021, which inadvertently resulted in a drop in the available Forex.
Nigeria has increased its demand for Forex from $500 million in 2015 to $6 billion in 2021.
Dr. Omobola Adu, a Research Analyst at GDL, pointed out that the Naira will only depreciate further because of the current trade deficits, which prompts the leaders to borrow. He finally stated that this would only add more pressure on the Naira.
The law of demand and supply controls the free market. In situations where the demand for a product outweighs the supply, scarcity follows suit.
The economics of scarcity prompts an increase in the prices of products. In essence, Nigeria needs more Forex than it earns at the moment.
The BDCs have been the primary retailers of Forex in Nigeria, but the recent CBN policy made Forex scarce in the black market, which led to the Naira depreciating.
Nigeria needs a more robust support of intervention to save the Naira.
Steps that can salvage the Naira
To the average Nigerian, if the Naira depreciated because of a policy move by CBN, why not reverse this policy and keep selling Forex to BDCs?
The problem with the above economic policy is that it is only a temporary solution. According to Godwin Emefiele, the CBN Governor, Nigeria is the only country that sells Forex from its external reserve to BDC.
He lamented that BDCs have deviated from their primary roles but now engage in graft and corruption practices in the country.
Economic analysts like Udegbunam applauded the CBN policy and clarified that genuine economic diversification is the only path to recovery.
For him, the federal government must encourage more local production and exportation to reduce the country's importation rate.
The CFO of Crichweather, Isaac Jacob, believes that the apex bank should have considered the fragility of the Nigerian economy before dropping BDCs.
According to him, the CBN should have ensured easy access to Forex in commercial banks before moving forward with the policy.
Alma Oputa, a Partner at Avant-Garde Capital Ltd, noted the federal government could turn the economy around by making Nigeria more attractive for foreign investment.
Analysts have advised that the country should be more attractive to foreign investors because it could restore the value of the Naira.
A report from NBS shows that foreign investments in Nigeria have been epileptic in the past six years.
The high dependence on oil has made Nigeria prone to economic recession whenever the price of oil dips, but recent events have shown that the country has a lot to gain from the diversification of the economy.
Nigeria's external reserves added over 5 billion USD between December 2016 to May 2017, when the oil price was as low as $35 per barrel. It was made possible by foreign direct investment.
To prevent the further dwindling of the Naira, Nigeria can take two significant steps:
1.Reducing the demand for Forex
Reports have shown that petroleum products are the most considerable demand for Forex in Nigeria. Reuters reported that Nigeria spends $18 million on fuel importation daily, about 6.6 billion per year.
The CBN also reported that Nigeria had spent over 36 billion USD on fuel importation between 2013 and 2017, which means that setting up a local refinery in Nigeria could go a long way to reducing the demand for Forex.
If Nigeria sets up a local refinery that could supply its demand for petroleum products, then there is a potential to save over 6 billion USD in Forex per year.
As stated earlier, Nigeria is an import-dependent country. The federal government must encourage local production to reduce the country's importation rate.
Increasing the number of exports also looks suitable for the external reserve because it earns more Forex.
Changes in the Nigerian economy can only occur when leaders take bold steps to implement adaptive economic policies.
Average Nigerians can do little or nothing to prevent Naira from going downhill. However, Dr Omobola Adu advised that the only way average Nigerians can protect themselves against the falling Naira is by investing in other stable currencies.
According to him, many Mutual funds pay a return on investments in dollars. Nigerians are also advised to stop saving in Naira but save up in stable currencies like the Dollar, pound sterling, etc.