Nigeria’s currency, the naira, has had an unstable relationship with foreign currencies since the 1980s. This has resulted in unpredictability, volatility, and financial gain for some.
However, it may interest you to know that when Nigeria adopted the Naira as its currency on January 1, 1973, the US Dollar was worth only 68 kobo (less than one naira). Today, 1 USD hangs around N1,435.55. This article aims to discuss the current depreciation of the Naira, its underlying causes, the socioeconomic impacts, and possible solutions to this problem.
The Economy of Nigeria
Nigeria is a culturally diverse federation of 36 autonomous states and the Federal Capital Territory, with the largest economy in West Africa. Despite having abundant deposits of crude oil and natural gas, Nigeria’s per capita income remains low, which is among the lowest of all petroleum-exporting countries worldwide. Its economic growth has been positive over the past two decades, with the highest point being recorded in 2002 when it reached a record high of 15.3%. However, like many African countries, Nigeria’s economy was hit hard by the end of the commodity supercycle and the onset of COVID-19, resulting in a recession in 2016 and 2020.
Nigeria’s economy enjoyed strong growth between 2000 and 2014 but slowed down from 2015-2022 due to factors such as monetary and exchange rate policy distortions, fuel subsidy costs, trade protectionism, and the COVID-19 pandemic. These factors led to high inflation rates and millions of Nigerians living in poverty. Nigeria has an overall ATI score of 34.5, slightly above the African average, but lacks diversification and export competitiveness.
Nigeria’s economy struggles with non-competitive non-extractive exports, despite having Special Economic Zones. The oil industry accounts for 95% of the country’s revenue and 80% of its budgetary income, making it vulnerable to global oil price drops. Nigeria extracts crude oil at a cost of around $30 per barrel, and with current oil prices at $45, the profit margin has dropped to $15.
The impact of the depreciation of the Nigerian Naira
A few years ago, Governor Emefiele implemented a ban on the Interbank forex market and 41 items from being eligible for forex as a measure to stabilize Nigeria’s economy. As a result, forex was being rationed, and the CBN (Central Bank of Nigeria) was responsible for deciding who gets what and how much.
However, after Nigeria’s new president, Bola (Ahmed Adekunle) Tinubu, suspended the under-fire CBN governor, Godwin (Ifeanyi) Emefiele, authorities removed key currency restrictions on Nigeria’s official foreign exchange market. This move resulted in a massive devaluation of the overvalued naira, aligning it with its black-market rate. However, the impact of a weaker naira on Nigeria’s domestic corporate and banking spheres is more complex.
According to the International Monetary Fund (IMF), the currency’s devaluation makes the country’s exports relatively less expensive for foreign buyers and makes foreign products relatively more expensive for domestic consumers, discouraging imports.
The recent devaluation of the Nigerian currency could have negative implications on the country’s banking industry. Weaker capital ratios and higher impaired loans are expected to result from this move. According to Fitch Ratings, the depreciation of the currency will cause an increase in the Nigerian banks’ foreign-currency-denominated risk-weighted assets, which will put pressure on their capital ratios. Moreover, foreign-currency-denominated problem loans are also expected to increase, leading to higher prudential bad-loan provisions for the banks.
Possible solutions to avert the issue
- Gross Reduction in Public Debts
When foreign investors bring investment into a country in US Dollars or Great Britain Pounds, etc, it increases the supply of foreign currencies in that country. As the amount of foreign currencies in circulation increases, the value of the country’s currency also appreciates. However, rising public debt beyond a sustainable level is a major concern for foreign investors. Reducing public debt would not only attract foreign investors but also increase the value of the naira.
- Expanding the export base of the country
One potential strategy to strengthen the Naira is to diversify and expand exports. Currently, Nigeria heavily relies on revenue generated from the sale of oil to sustain its foreign exchange. The agricultural sector is one area that can be diversified to increase the country’s export base. However, when the international market experiences a decline in crude oil prices, it directly impacts Nigeria’s earnings. In such instances, the government often resorts to borrowing to cover up for the reduction in income. Since oil is the country’s highest foreign exchange earner, any downward trend in crude oil prices drastically affects the Naira.
- Cut down on inflation
To improve the value of the Nigerian currency, the Naira, the Federal Government needs to tackle inflation. It is essential to reduce inflation rates below those of competing countries, as this will make Nigerian goods more appealing, leading to an increase in demand. The current inflation rate in Nigeria is 12.59%, while in the US, it is only 0.6%. If the Central Bank of Nigeria and the Finance Ministry can implement appropriate monetary and fiscal policies to reduce the inflationary gap of 11.99% between the Nigerian Naira and the US dollar, the Naira’s value will fair better against the dollar.
