Naira depreciation adds N9tn to foreign debt burden

The value of naira to dollar fell from N196.92 in June 2015 to N414.72 in June 2022, worsening Nigeria’s foreign debt burden.

Within the seven years under review, the naira depreciated by 52.52 per cent against the US dollar.

The Monthly Average Exchange Rates of the Naira (Naira Per Unit of Foreign Currency) for 2015 document obtained from the website of the Central Bank of Nigeria shows that the one dollar was N196.92 for Inter-bank Foreign Exchange Market.

The exchange rate for one dollar as of June 30, 2022, was N414.72, according to the figure provided by the CBN.

The PUNCH recently reported that Nigeria’s total external debt rose from $10.32bn as of June 30, 2015, to $40.06bn as of June 30, 2022.

This showed that there was an increase of 288.18 per cent in seven years, according to the external debt stock reports by the Debt Management Office.

A breakdown shows that in 2015, states had $3.27bn external debt while the Federal Government had $7.05bn.

By 2022, states’ external debt had risen to $4.56bn, while the Federal Government’s external debt was $35.5bn.

The debts include: loans from multilateral sources such as the World Bank, the African Development bank and the International Monetary Fund, including those from bilateral sources such as China, France, Japan, Germany and India.

They also include debts commercial sources, which include Eurobonds and Diaspora bonds.

If the CBN average exchange rate for June 2015 was used to weigh the country’s current $40.06bn foreign debt, Nigeria’s external debt in naira terms would have been N7.89tn.

However, with the exchange rate of N414.72 as of June 30 this year, the total external debt in naira terms was N16.61tn, showing a difference of N8.72tn.

By implication, it will cost Nigeria N8.72tn in naira terms if the country decides to pay back the $40.06bn external debt in 2022. If this same debt was incurred in 2015, Nigeria would have spent N8.72tn less, given the then exchange rate of N196.92/$.

Reacting, the Managing Director/Chief Executive Officer of Cowry Asset Management Limited, Mr Johnson Chukwu, said that high external debt would impose a huge debt service on the economy.

He said, “This will impose a huge debt service on the economy, particularly at a period when we have low revenue from oil sales. If the revenue from oil sales does not improve, then the government will be struggling to meet that debt service obligation to foreign lenders.”

However, he noted that Nigeria could service its foreign debt at the current level, but a constant increase in debt without a corresponding increase in foreign currency earnings could put the country in a difficult position.

Policy failure

In a bid to manage the value of the naira, the CBN introduced a number of policies such as stopping 41 items from accessing forex at the official market, offering N5 for every $1 of funds remitted to Nigeria through Internal Money Transfer Organisations, banning the supply of forex to Bureau de Change, among others.

However, these policies have not been able to guarantee naira stability.

The World Bank has said it disagrees with the CBN on how it tries to achieve price stabilisation of the naira, adding that the local currency should be allowed to respond to real pressures, and not be bottled up by the CBN.

It added that the country’s exchange rate strategy discouraged investors and increased inflation risks.

A Global Finance Report has also said that the CBN has failed to curb rising inflation and stop the naira from sliding against the US dollar.

The International Monetary Fund recently said that the long-term rate of the depreciation of the naira equated to a loss of 10.6 per cent of its value annually since 1973.

According to the IMF, this rate was 1.5 times higher than the long-term rate of the currencies of other emerging markets and developing economies at 7.2 per cent, and sub-Saharan Africa at seven per cent over the same time period.

The IMF said, “Its exchange rate underwent more persistent depreciation. Nigeria’s long-term rate of currency depreciation (on average 10.6 per cent annually since 1973) was 1.5 times higher than both EMDE (7.2 per cent) and SSA (seven per cent). Given limited availability of long-term data, it is difficult to estimate the exact reasons.”

The Bank of America recently said Nigeria’s local currency unit was set to weaken further next year as its current exchange rate to the dollar was well above fair value.

According to a report by Bloomberg, “Three indicators, the widely-used black-market rate, the central bank’s real effective exchange rate, and our own currency fair value analysis show the naira is 20 per cent overvalued.

“We see scope for it to weaken by an equivalent amount over the next six-nine months, taking it to as high as 520 per USD.”

During a workshop on tax expenditure organised by the ECOWAS Commission in Abuja, financial experts advised that Nigeria and other West African countries should move away from reliance on foreign assistance to finance developmental projects in the region.

According to them, over-dependence on financial aid and external loans might affect long-term prosperity for the entire region.

The Special Advisor to the Director (Custom Union and Taxation in ECOWAS), Gbenga Falana, while emphasising that the debt profile of most of the countries in the sub-region was mounting, stressed the need for West African countries to look inwardly and finance local projects through effective domestic resource mobilisation.

Supply, demand factors

Most experts who spoke with The PUNCH described the current situation as naira devaluation, rather than depreciation.

While depreciation is driven by demand and supply, devaluation is often a policy measure employed by the central bank to achieve certain economic outcomes.

A member of the Monetary Policy Committee, who spoke in confidence with our correspondent, said certain demand and supply factors were triggering the devaluation.

The source said, “The issue of devaluation is a function of demand and supply factors. If the value of a currency is depreciating, it means the demand is more than the supply.”

On the issue of supply, he said that the country was not exporting enough and foreign investments into the country were dropping.

“If we are having issues with supply, it is either the export is not growing, or foreigners are not investing in the country.

“Our export is mainly oil, but there are issues like sabotage in Niger Delta areas. Our volume has not been increasing as it should, and then subsidy as part of what we earn is also spent on subsidising refined product.

“Also, our non-oil export is not growing, which means that we have not been diversifying the economy sufficiently to move away from oil to non-oil,” the source said.

The source also said that the pandemic, insecurity and certain policies contributed to devaluation.

He said, “Also, the pandemic has affected remittances, and there has been decreasing capital flow, especially due to insecurity. Foreigners are also not happy with the policies that we practice. There is risk in the system discouraging investors. All of these contribute to the failure of supply.”

On the issue of demand, the source said there had been the issue of people buying dollars to use as bribes and to keep. This, among other things, had led to more demand than supply, he noted.

“On the demand side, people demand for foreign currencies to import raw materials, final products or capital goods. In Nigeria, we also see that the dollar has become the currency that people use to bribe. There are also those who buy dollars to keep them. This makes the growth in demand  higher than that of supply, affecting exchange rate over the year,” the MPC member said.

The source added that the government needed to restructure the economy, reduce  dependence on oil, address the issue of oil subsidy, while controlling speculators buying dollars to keep.

Low export

A Professor of Economics at the Olabisi Onabanjo University, Ago-Iwoye, Ogun State, Prof Sheriffdeen Tella, said there were certain political and economic issues triggering naira devaluation.

On the economic side, he said the increase in import over export and illicit capital flows had been major reasons for naira depreciation.

He said, “The devaluation is caused by both political and economic issues. The economic issue is that we continue to import goods, and we are not exporting much beyond oil. Also, the non-oil sector is not doing very well, and we are still importing more.

“There is also the issue of illicit capital flow. That is, people taking foreign currency without caution. The coronavirus has also affected output.”

He also said that the CBN had been intentionally devaluing the naira in order to increase the funds given to state governments.

“On political grounds, the CBN, probably with collusion from the Ministry of Finance, has been devaluing the value of the naira officially to increase the amount of naira given to the state government.

“The official devaluation of naira has taken place twice, and that is a political thing. They are doing it to satisfy fiscal expenditures,” he added.

He urged the government to address these issues to achieve naira appreciation.

Productive economy

A professor of Economics and Public Policy at the University of Uyo and Chairman of the Foundation for Economic Research and Training, Prof. Akpan Ekpo, condemned the intentional devaluation of the naira by the CBN.

He said, “When you devalue, you are hoping that the goods you export will be cheaper. You can export more and earn more revenue. However, our major export is crude petroleum, and we don’t control the price or output. So, we don’t get anything from the government’s outright devaluation.”

Ekpo urged the government to boost production and ensure the country had a strong, productive economy.

“The only way we can stop the devaluation of currency is production. We need to produce more goods and services, and export them to earn foreign exchange. That is our basic problem in Nigeria; we consume what we don’t consume.

“The government needs to build an economy that is strong and doesn’t rely on one commodity,” he told our correspondent.

(Punch)