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The high cost of defending naira against the dollar

3 years ago
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The high cost of defending naira against the dollar

How low can the Naira fall?

The majority of Nigerians are currently holding their breath on this query. With the naira’s exchange value continuing to grow at an alarming rate, Nigerians appear to have had enough. The Nigerian currency’s value is drastically declining, particularly in the parallel market, on dwindling dollar liquidity.

The biggest economy in Africa maintains a number of exchange rates, which are primarily a carefully regulated official rate and an unofficial parallel market, which is around 60% weaker and is used by many Nigerians to obtain dollars. The IMF and World Bank have pushed Nigeria to standardize its exchange rates.

The naira had lost at least 94.87% of its value in five years, according to Financial Derivatives Company, surpassing N715/$ before recently sliding to N645/$ and currently trading at N703/$.

The Central Bank of Nigeria poured $7.6 billion into the economy in just the first five months of this year to stabilize the value of the naira. This information is contained in the monthly economic reports on foreign exchange market trends published by the banking regulator.

The CBN’s summary in the banking regulator’s monthly economic updates on foreign exchange market developments revealed the lengths to which it went to defend the naira. The CBN reportedly interfered in the markets with $1.65 billion, $1.39 billion, and $1.82 billion in January, February, and March, and $1.56 billion and $1.18 billion in April and May, respectively.

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Godwin Emefiele, the governor of the Central Bank of Nigeria (CBN), earlier this year declared that the CBN would discontinue selling foreign currency to deposit money banks by the end of 2022 as another move to protect the naira.

It earlier ceased allocating foreign currency to operators of Bureau de Change. Even after showing signs of recovery from a record low on Thursday, Nigeria’s local currency is still expected to deteriorate over time, the country’s finance minister warned.

The CBN has also attributed the problem to political corruption, money laundering, and support for terrorism. The alleged non-remittance of foreign cash by the former Nigerian National Petroleum Company was the most recent justification offered for the naira’s continued nosedive in value (NNPC).

The Nigerian oil state company quickly refuted this, claiming that it had sent the CBN a total of $2.7 billion in the previous six months. The apex bank has implemented numerous endlessly chaotic policy measures during this time, but all of them have been fruitless.

However, financial analysts cautioned that the attack on the naira is planned to continue for as long as the political authorities find it challenging to enact some strict regulations capable of reversing the downward trend in the value of the naira.

They referred to the federal government’s reluctance to capitalize on the current high price of crude oil on the global market, at a time when other oil-producing nations are investing the oil windfall in their economies, as regrettable.

The policy of gasoline subsidies may be the biggest drain on the country’s economy and dollar savings. The subsidy structure is causing a high level of corruption in addition to sapping the biggest chunk of income since Nigeria’s actual fuel usage is still cloaked in mystery.

Since gasoline is still an imported good, pressure is put on the federal government to set aside a sizable portion of its dollar profits for this unsustainable fuel subsidy, which will further worsen the naira’s situation. This unintentionally pushes out other economic sectors, forcing them to shop in parallel markets with their skyrocketing prices.

According to a recent study by Mr. Bismarck Rewane, Chief Executive Officer of Financial Derivatives Company Limited (FDC), the forecasts for the entire year would surpass the total expenditure by all the states of the federation in 2021, which was $9.8 billion.

The economist stated that while between 2015 and 2020, $5.5 billion was spent on subsidies, in 2021 alone, it increased to $3.8 billion, and $6.2 billion in just the first quarter of 2022, in the most recent edition of his monthly Breakfast Meeting report held at the Lagos Business School (LBS).

To ease supply pressure from the CBN, the Nigerian currency will unavoidably need to be depreciated at the Investors and Exporters (I&E) foreign exchange window rate.

FDC report further stated that the federal government could earn at least N600 billion by changing the exchange rate to N470 for every $1, although it was acknowledged that eliminating subsidies might not be politically desirable.

In an interview, while at the new administrative capital of Egypt, Minister of Finance Zainab Ahmed admitted that Nigeria’s currency would likely drop considerably further. She said, without mentioning a specific timeline, “It will happen in due course.”

Tags: Central Bank of Nigeria (CBN)dwindling dollar liquiditynairaNigeriaThe high cost of defending naira against the dollar
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