Nigerian economy: Why the Naira is failing

Franklin Izuchukwu

The Nigerian Naira has been on a depreciating path since the inception of the country. Here is a comprehensive analysis on why the Naira is failing and how to save the Naira.

Bunch of 100 US dollar bills and 100 Naira bills.

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 parallel market. By the end of the market on October 15 2021, Naira was trading at N573.5/$1 on the parallel market.

The gap between the parallel and official rate has been disheartening; the difference is more than N100, which is why Naira closed at N415.07/$1 (official rate) on October 15 2021.

The Nigerian Naira has experienced enormous pressure since the CBN rolled out a new policy that stalls the remittance of USD 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 world economy formed a new trajectory on August 15, 1971, when U.S president Richard Nixon implemented a new economic plan that moved the world from the age of the gold standard to a fiat monetary policy.

The U.S Dollar became the world de facto reserve currency in 1973 when U.S Secretary of State Henry Kissinger reached an agreement with the royal house of Saudi Arabia to monopolize the USD as the sole currency for international oil trade.

Since then, Countries have been measuring their economic performance against the USD, and Nigeria is no different. Nigerians have often wondered why the CBN has failed in the attempt to save the Naira.

The question is, why has the Naira been failing amid periods of economic prosperity and recession? What is the underlying problem?

This article seeks to answer the above questions and highlight the real issue behind the rise and fall of Naira.

History of the rise and fall of 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 Naira in the Nigerian economy plays an integral role in answering why the Nigerian Naira is failing.

In January 1973, the Naira replaced the Nigerian pound and was pegged at N1 to 10 Uk Shillings. It also sold at N1 to 0.62 USD at the time.

The Babaginda military regime pursued a neoliberal structural adjustment programme that dealt a heavy blow to the Nigerian economy and saw the devaluation of Naira to 1.75 USD. By 1993 the Naira was trading at N22 per dollar.

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 was selling at N198.914 to $1. By 2018, it fell further to N306.08.

The Naira has been on an up and downward spiral since 2018, which bolsters the fact that the Naira problem did not start today.

Nigeria prime minister Tafawa Balewa with other dignitaries in the signing ceremony during independence.

The problem with the Nigerian Naira

Nigeria is dealing with an economic crisis, but the most obvious is Naira depreciation. Since the central bank of Nigeria (CBN) banned the sale of foreign exchange to BDC, Naira has fallen from N505/$1 to N570/$1 in the black market.

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 practise 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 results 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 appreciate 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, then scarcity follows suit.

The economics of scarcity prompts the 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.

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 issue with the above economic policy is that it is only but 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 the only path for recovery is genuine economic diversification.

For him, the federal government need to encourage more local production and exportation to reduce the rate of importation in the country.

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 the easy access of 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 made more attractive to foreign investors because it could restore the value of 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 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 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 per day, 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 of saving over 6 billion USD in Forex per year.

2. Increasing exportation

As stated earlier, Nigeria is an import-dependent country. The federal government must encourage local production to reduce the rate of importation in the country.

Increasing the number of exports also looks suitable for the external reserve because it earns more Forex.

Nigeria needs more Forex than it earns.

Final words

Changes in the Nigerian economy can only occur when the leaders take a bold step 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 of investments in dollars. Nigerians are also advised to stop saving in Naira but rather save up in stable currencies like the Dollar, pound sterling, etc.