In a tumultuous economic landscape, Nigeria’s currency, the naira, is heading towards its most significant decline since the return to democracy in 1999. Analysts paint a grim picture, predicting further depreciation in the coming year as the nation grapples with a series of economic challenges.
The naira’s woes are evident in the numbers, having plummeted by a staggering 55% against the dollar, standing at 1,043 per dollar in the official market as of Thursday. This unfortunate distinction makes the naira the world’s worst-performing currency after the Lebanese pound and the Argentine peso among the 151 currencies tracked by Bloomberg. On the streets, the grim reality is even harsher, with the currency trading at 1,208 naira per dollar.
Behind this unprecedented decline lie the dwindling foreign reserves in Africa’s largest crude oil producer, now at a six-year low. The reserves are heavily encumbered by overdue short-term overseas obligations, creating a precarious economic situation. Analysts express concern that unless President Bola Tinubu’s government can attract international investors or bolster oil output, the naira may face further depreciation. Vetiva Capital Management Ltd. warns that the naira’s 12-month contracts in the non-deliverable forwards market are trading near a record low of 1,294.44 to the dollar.
Patrick Curran, a senior economist at Tellimer Ltd., emphasized the need for “further devaluation — alongside tighter monetary policy — to reduce imbalances in the FX market.” The economic challenges are exacerbated by inflation, which has surged to 28.2%, while the benchmark interest rate remains at a lofty 18.75%. This negative real interest rate has discouraged overseas investors, adding to the complexities of Nigeria’s economic situation.
Vetiva Capital Management Ltd. proposes a potential remedy, stating that “a significant rise in external reserves, a material increase in foreign exchange inflows, and a reduction in money supply” would be positive for the naira. These measures could pave the way for stabilization, offering a glimmer of hope amid the gloomy economic outlook.
The naira’s downward spiral commenced when the Central Bank of Nigeria (CBN) allowed the currency to trade more freely in June, coinciding with President Tinubu’s decision to scrap costly petrol subsidies. While these measures aimed to address economic challenges, the resultant weakening of the naira fueled inflation, contributing to the current predicament. With inflation standing at 28.2%, the central bank faces the challenging task of striking a delicate balance between stabilizing the currency and controlling rising prices.
Furthermore, the depreciation witnessed across both official and unofficial markets this year followed the CBN’s move to unify the nation’s multiple FX windows. In June, the CBN announced the unification of all segments of the country’s FX window, allowing the local fiat to trade more freely. The reintroduction of the “Willing Buyer, Willing Seller” model at the Investors and Exporters (I&E) window was also part of this initiative, facilitating eligible transactions to access foreign exchange based on guidelines outlined in a circular dated April 21, 2017.
However, the ripple effect of the cash crunch resulting from the naira redesign policy earlier in the year has added to the inflationary pressure in the country. As Nigeria navigates these economic challenges, the trajectory of the naira remains a critical concern. Eyes are now on potential policy adjustments, both domestic and international, that could offer stability to the beleaguered currency in the upcoming year. The nation watches with bated breath, hoping for a turnaround in the economic fortunes that have dominated headlines throughout 2023.