The CBN recently stated that it will not give in to demands to further devalue the local currency, despite a record decline in the exchange rate of the Naira versus the US Dollar at the parallel market.
In the midst of the ongoing FX crisis in the biggest economy in Africa, the CBN Governor, Mr. Godwin Emefiele, recently stated: “It is shocking that even analysts who should know better are relying on parallel market rates to argue that our currency is overpriced and therefore needs to be devalued. The situation is terribly regrettable.
“Approximately 5% of the Nigerian foreign exchange market is accounted for by the parallel market, which is often the scene of corruption and bribes.” He added.
Following the apex bank’s decision to hike interest rates by 150 basis points to support naira-denominated assets and moderate excessive inflation, the exchange rate between the naira and the US dollar has dropped to a record low on the black market, trading at a minimum of N737/$1 on Friday.
“We disagree that a corrupt market should be used to determine the foreign exchange rate. This will not serve as our standard for calculating the worth of our money,’” Emefiele concluded.
The pressure on the naira has persisted as many Nigerians scurry to find dollars to pay for imports, school expenses, medical and other expenses. Because the CBN has been unable to satisfy demand on the legal market, many people have been compelled to turn to the underground market, which has raised prices.
The naira is heavily exposed to manipulations, round-tripping, and other rent-seeking behaviors by both the wealthy and the poor, which contributed to the historic decline.
Major Actors Sabotaging The Naira
In anticipation of a further decline in value, Nigerians from all walks of life are shorting the naira through various strategies that reflect their economic strength and exposure.
Nigerian citizens are permitted to buy dollars at the official exchange rate for overseas education, personal travel expenses, and medical costs, which are frequently leaked to the black market in order to profit from the market premium pricing. Additionally, there hasn’t been much supply recently because the central bank hasn’t been able to keep up with the rising demand from students hoping to start their studies abroad in September. Those who can’t wait have been compelled to shop at the parallel market.
The demographic of those interested in dollar-denominated accounts have expanded from the middle class to include craftsmen, low-income earners, and students. Independent sources note that rising requests for dollar accounts are reducing interest in conventional naira savings accounts, particularly among young people.
The local currency of late has been under intense pressure against the greenback as Nigeria’s political elite stockpiles dollars before the upcoming elections slated in Q1 next year
Reports reveal politicians vying for votes are dramatically driving up demand for dollars in cash. Recall demand and supply were further out of balance as political parties competed for cash to give out to delegates in the presidential primaries held in May and June.
In addition, at a time when the American economy has some obvious bright spots, the value of the dollar is rising.
It is currently at its strongest point in two decades and is expected to get even stronger. Markets and economies around the world, particularly frontier markets like Nigeria, are being shaken by the emerging dominance of the dollar.
Given that this oil rich country still heavily depends on imports to meet domestic agriculture and energy demands, a strong dollar means that the country would have to spend more on import bills, thereby increasing inflationary pressure.
Poor foreign direct investment
About $700 million in foreign direct investment was made in 2021, down from $3.1 billion at the beginning of President Buhari’s administration in 2015.
Due, in part, to the challenges of remitting earnings, Nigeria had lost its appeal to foreign investors.
Liquidity in the FX market is obviously limited. The most populous nation in Africa depends heavily on oil imports, but other money flows are also necessary, including remittances, the majority of which bypass formal channels.
One factor is the spate of global crises, such as the coronavirus epidemic, supply chain blockages, Russia’s invasion of Ukraine, and a number of natural disasters that have put the world’s food and energy supplies in danger, driving up the dollar costs on Nigeria’s most needed imports.
Oil theft & petrol subsidy
The biggest economy in Africa has been rationing dollars as a result of the decline in oil revenue, which makes up more than 80% of its foreign exchange earnings. Additionally, crude oil is stolen from the country, and gasoline prices are subsidized with petroleum income.
According to Nigeria’s oil regulator, the nation lost 141 million barrels of crude oil, or $1 billion in income, in the first quarter of 2022. As it provided additional gasoline, Nigeria’s fuel subsidies in August exceeded $1 billion.
The value of the naira is primarily influenced by supply and demand considerations, much like any other currency. The fundamental cure still lies with the amount of forex liquidity in the system.
Disequilibrium is produced by the existing market. There may not be stability until Nigeria’s currency market can reach equilibrium. In order for a participant to come and purchase and sell at a market price like any other transaction, it must liberalize the market or modify the value of the naira to a much fairer value while the Nigerian political class deals with the nation’s major fiscal issues.