In recent months, the Nigerian currency, the Naira, has exhibited stability, fluctuating between 1600 and 1700 naira to 1 USD. Following the inauguration of the current administration, the naira experienced a significant decline, marking one of the steepest falls in its 51-year history since its introduction on January 1, 1973, when it replaced the British Pound at a rate of 2 Naira to 1 Pound.
Although the currency has gradually weakened over the years, the current rate of decline is unprecedented. When President Tinubu assumed office 17 months ago, the currency was valued at 465 Naira to 1 USD in the foreign exchange market. Since then, the naira has been on a steep downward plunge, reaching 1700 Naira to 1 USD at a point.
Presently, the Naira trades at approximately 1642 naira to 1 USD.
The cooling of the Naira in recent months can be partially attributed to the elimination of the multiple exchange rate regime; where there exists an official rate set by the Central Bank of Nigeria (CBN) and a parallel market rate (black market), i.e the government’s oil-for-naira initiative. Also, the administration announced its decision to commence oil sales in naira to the Dangote refinery, the largest oil refinery in Africa, as a strategy to alleviate pressure on the naira and reduce costs for the refinery. While this initiative is indeed a bold and innovative approach and a temporary fix, it is unlikely to significantly mitigate the naira’s volatility or reverse its devaluation trend.
Here are my reasons:
First, Nigeria failed to address declining revenue due to overdependence on crude oil and import goods. The nation’s dependence on the importation and sale of crude oil as its primary revenue source is likely to weaken the naira further. The economy cannot sustain itself if it continues to rely solely on oil exports.
Crude oil exports account for about 90% of Nigeria’s foreign exchange earnings. The narrative might shift if oil demand remains robust, leading to price increases. However, this is not the current reality. Since 2014, oil prices have seen considerable volatility, particularly amid global oversupply and geopolitical tensions. The COVID-19 pandemic has exacerbated these challenges. Oil prices have plummeted as oil demand diminishes due to the rise of alternative and renewable energy sources and clean battery-powered vehicles.
In 2022, despite a temporary spike in oil prices following Russia’s invasion of Ukraine, which disrupted the oil supply chain, Nigeria failed to capitalize on the influx of dollars to diversify and strengthen its economy. Ineffective management, waste, and corruption led to a missed opportunity. Oil prices have since declined and are expected to continue on this downward trajectory as more countries transition to renewable energy.
Additionally, the country’s dependency on imports for nearly all consumable goods and limited dollar reserves has perpetuated a chronic foreign exchange shortage, undermining the naira’s value. This ongoing currency crisis is expected to persist until there is a concerted effort to diversify the economy.
Second, Nigeria’s ongoing borrowing trend amidst a growing debt burden raises significant concerns for fiscal sustainability. Rather than pursuing a restructuring strategy and cutting back on excessive government expenditures at all levels, the nation continues to rely on loans to maintain its lavish spending habits. A case in point is the acquisition of the presidential jet Airbus A330, which adds to an already extensive fleet of eleven aircraft.
Additionally, the procurement of 360 Special Utility Vehicles (SUVs) at an estimated cost of N57.6 billion for Senators and Members of the House of Representatives exemplifies this trend, alongside the exorbitant expenses associated with international travel for lawmakers and government officials. For instance, the Tinubu administration allocated a staggering $507,384 (N390.7 million) for hotel accommodations for its delegation during the 78th United Nations General Assembly (UNGA) session in New York last year, with an extra $84,564 (N65.1 million) earmarked for unspecified incidental charges. As we anticipate the financial implications of the recently concluded UNGA, one can only speculate about the potential costs involved.
This pattern of extravagant spending carries severe ramifications; it necessitates increased borrowing. As the volume of borrowing rises, servicing this debt will require foreign exchange, which has resulted in a depletion of reserves, given the current decline in revenue streams. A significant debt load and diminishing foreign exchange earnings will exert additional pressure on the naira, contributing to its continued depreciation.
Then, there is capital flight and dollarization of the economy. The interplay of the two has played significant roles in the decline of the naira, contributing to forex shortages and a lack of confidence in the local currency. This will continue if the government fails to intervene.
Here is what I mean: the last few years have seen a large-scale exodus of financial assets or capital from Nigeria, typically as investors and businesses move their money abroad due to economic instability and uncertainty. This trend has significantly weakened the naira and is expected to persist in the foreseeable future.
For example, in the months and years during and after the COVID-19 pandemic in 2020, foreign investors began to pull capital out of Nigeria. For instance, the Nigerian Stock Exchange saw a significant drop in foreign portfolio investment, with many investors converting naira into dollars and exiting the country. Sanofi, a French pharmaceutical company, announced its exit from Nigeria in 2023, 54Gene shut down its operation in September 2023, Unilever ceased operation in December 2023, and Shoprite has since confirmed its exit since 2020. Others who have scaled down in recent years are Bayer AG, Procter & Gamble Co. Kimberly-Clark Corporation, Microsoft Corporation, and Tiger Brands Ltd. These are just a few. As these outflows increased, the demand for the dollar surged, putting pressure on the exchange rate and contributing to the naira’s decline.
Rather than implementing measures to stabilize the local currency, the government overlooked and observed a shift among local businesses and individuals toward dollar transactions. This dollarization is particularly pronounced in sectors such as real estate, where property prices in major cities like Lagos and Abuja are often quoted in dollars. Importers and large-scale retailers also frequently transact in dollars because of the volatility of the naira.
The interplay of these factors is likely to perpetuate a detrimental cycle of currency depreciation. As businesses and individuals continue to convert naira into dollars and remit funds abroad, a reduction in the availability of foreign exchange within Nigeria ensues, further undermining the naira’s value. Concurrently, as an increasing number of economic sectors adopt dollarization, the demand for the naira will diminish further, eroding its purchasing power and overall stability.
Should this behavior continue unchecked due to insufficient regulation, it will undoubtedly exacerbate the demand for foreign currency, leading to an increase in the exchange rate and further contributing to the devaluation of the naira.
The above points have established and will perpetuate a feedback loop significantly undermining the naira’s strength.
To tackle these challenges, Nigeria needs to focus on rebuilding confidence in the naira by implementing stable economic policies, decreasing dependence on oil, minimizing borrowing, eliminating waste and misuse, and fostering foreign direct investment by creating a conducive environment for businesses to thrive. Absent these measures, the naira will undoubtedly crash again.
Email: JlaBode74@gmail.com