The pressure on Nigeria’s new president Bola Tinubu to overhaul Africa’s largest economy has increased as the country’s currency has fallen to record lows against the US dollar.
When Tinubu assumed office in May, he promised to make a clean break from his predecessors’ policies in order to entice foreign investors to set up shop in Nigeria. One of the goals was to increase the value of the naira relative to the dollar.
However, after separating from the US dollar in June, the currency has declined. According to reports from LSEG, the official exchange rate for the dollar dropped to as low as N880 this week. The price of essential imports has risen along with inflation as a result, and investors remain unconvinced by the reforms.
Lack of available dollars is seen as a major contributor to the naira’s precipitous drop. The Central Bank of Nigeria (CBN) stated earlier this month that the “surplus demand for foreign exchange” was caused in part by the 2015 ban on dollar access for some enterprises. This forced importers to turn to the black market.
As a result of the change, prices on black markets have dropped considerably. The exchange rate for the dollar reached as high as N1,290 on the internet trading platform abokiFX.
“Nigeria is a country in dire need of foreign exchange,” says Wilson Erumebor, a senior economist with the Nigerian Economic Summit Group think group.
To entice foreign exchange into the economy, officials must a definite policy direction. Recent events have demonstrated the widespread lack of faith in the naira.
Importers were cut off from the official dollar market by Tinubu’s predecessor, Muhammadu Buhari, who did this to encourage domestic production. Olayemi Cardoso, a former Citi banker and the country’s new governor, has instituted a “willing-buyer and willing-seller” pricing mechanism.
However, when the peg was removed in June, the currency experienced its largest one-day drop ever. Inflation hit a 20-year high of 26.7% last month in part because of this.
The loss of purchasing power has made it harder for the government to strike a balance, according to Charlie Robertson, head of macro strategy at FIM Partners, an asset management business.
He said that Nigeria needed to offer better interest rates to non-Nigerian residents and visitors in order to keep their dollar holdings in the country. Inflation is well over the CBN’s key lending rate of 18.75%.
Interest rates would rise if rates were raised, he said. If interest rates aren’t high enough to make the naira appealing, the currency will likely overshoot and become far too cheap, which is bad for confidence.
“Nigerians, let alone foreigners, don’t want to lose money owning naira when they make more in dollars buying Nigerian bank bonds,” he continued.
The local foreign exchange market has been advised by analysts and economists that it needs additional dollars to stop the naira from plunging.
“There is too much demand but not enough supply,” one peddler in the black market stated. Everyone is scrambling to get their hands on dollars because the central bank may have intervened in the market in the past, but they haven’t this time.
According to figures from Financial Derivatives Company, a Lagos-based consultancy, capital imports into Nigeria decreased by 33% year-over-year in the second quarter of this year, totaling $1.03bn. “The inflow of dollars remains limited due to policy uncertainty and lingering security issues,” the report concluded.
As of this month in the second quarter of the year, the average daily value transacted on the Nigerian Autonomous Foreign Exchange Market had plummeted 22 percent to $101.37mn, according to data from FDC.
We still don’t know where to find foreign currency. Nigeria relies heavily on oil exports for foreign currency, but the country is failing to meet its daily 1.8 million barrel Opec quota. Despite increases in oil prices, the country’s external reserves, totaling $33.28bn, have decreased during the past month.
The state oil corporation, NNPC, was supposed to receive $3bn from the African Export-Import Bank (Afrexim) in August as part of an oil-for-dollars deal, but the money has not yet been disbursed.
The Nigerian government has a “line of sight” on $10 billion coming into the country in the coming weeks, Finance Minister Wale Edun said earlier this week.
Many companies report that their funds are frozen in the country of Nigeria, with airlines being particularly hard hit. In a June analysis, the International Air Transport Association found that $2.27 billion in airline funds were stranded worldwide, with $812.2 million of that total originating in Nigeria.
Erumebor noted that Nigeria’s low productivity and emphasis on oil contributed to the falling naira. He predicted that a weaker naira would increase export competitiveness. To quote a friend, “Nigeria should be leveraging exports to the rest of the world, but it doesn’t make enough of anything to export.”