The Nigerian Naira’s Decline: What You Need to Know
The Nigerian naira, Nigeria’s official currency, is currently facing significant challenges, with its value approaching a record low. The naira fell to 999 per dollar last week, according to Refinitiv data. This decline can be attributed to various factors, including the country’s foreign currency controls and a decline in dollar flows to Nigeria.
The Impact of Foreign Currency Controls
In an effort to unify the naira’s exchange rates and encourage transactions through the official market, President Bola Tinubu removed Nigeria’s foreign currency controls in June. However, this move has not yielded the desired results. Instead, it has further weakened the currency and added to inflationary pressures.
The Backlog of Forex Demand
One of the reasons individuals and businesses turn to the black market for dollars is the central bank’s backlog of accumulated forex demand. This backlog forces people to seek alternative sources for foreign currency. Additionally, declining investment and lower exports have led to a decrease in dollar flows to Nigeria.
The Foreign Currency Backlog and Forex Reserves
Nigeria currently has a significant backlog of nearly $7 billion in forex forwards that are past due. This backlog has created challenges for corporates looking to obtain new letters of credit, while banks are owed dollars. Furthermore, Nigeria’s forex reserves have fallen from $37 billion in January to $33.5 billion in September, according to central bank data. This decline can be attributed, in part, to a $19 billion commitment in derivatives.
The Role of Nigerian Banks
Nigerian banks are not allowed to have open positions on the dollar, meaning they cannot buy forex for their own accounts or speculate on the currency’s value. This restriction prevents banks from creating a fully functioning forex market. If banks were allowed to make the market on the dollar, it could further weaken the naira.
The Future of the Naira
Nigeria’s 2024 budget assumes a benchmark exchange rate of 700 naira to the dollar. However, the current parallel market rate of 1,300 naira does not reflect the true value of the local currency. Capital Economics predicts further devaluations and rises in inflation as the naira remains weaker on the parallel market.
In conclusion, the Nigerian naira’s decline is a result of multiple factors, including foreign currency controls, a backlog of forex demand, declining dollar flows, and low forex reserves. The future of the naira remains uncertain, with challenges persisting in the country’s efforts to unify exchange rates and stabilize the currency.
