The Nigerian Naira has continued its decline since mid-June of 2015, as crude oil prices tested a $115/bbl price level before it came crashing, which saw the international price of the black gold at $44.25 in early September 2016 and successfully terminating a 4-year successive run over $100 in the prices of crude oil. In mid-June 2014 the Naira traded at ₦162/$ at the interbank market and latter dipped to ₦186/$ at the interbank market in November 2014 (i.e. five months later) in line with the devaluation by the CBN.
There has been a shortfall in the supply of forex which is largely as a result of weak crude oil receipts induced by the crash in the international price of the black gold (which accounts for over 90% of the Nigeria’s export earnings), a major contributor of its external reserves and also subsidizing over 70% of Nigeria’s National budget.
The continuous swing in crude oil prices that was witnessed in 2015, accompanied by the shortage in foreign exchange, had the Nigerian apex bank realizing that it is untenable to use the country’s external reserves to defend the Naira. We saw the Naira silently devalued to ₦198/$ upon shutting down the Retail Dutch Auction System (RDAS) market, which saw the merging of the interbank and official segments of the forex market. Many see this decision as long overdue in line with the need to put a lid-on rent-seeking, round-tripping, bogus demand along with other wasteful uses of scarce U.S. dollars that have become the hallmark of the Nigerian FX scene for decades.
The Naira touched ₦345/$ at the interbank market in the third week of August 2016, and crashed to ₦405/$ at the parallel market, a result of the continuing crisis of confidence, an inadequate fiscal and monetary response from the authorities. Since that time management of the official rate has brought it back to reach ₦315/$ at end November 2016, but the parallel market rate has crashed further to ₦473/$.
The Knock-on effect
Whatever negative pull the Naira is experiencing at the moment, it will by extension be felt on the Nigerian economy i.e. the citizens. Inflation has reached double digits in 2016, touching 17.1 % in July of the same year according to the National Bureau of Statistics (NBS). The cost of living has jumped and the purchasing power of the average Nigeria has been battered.
The Naira crisis has a negative effect on consumer spending, which is hurting the retail and services sector; leading to deteriorating profits and eventually triggering job cuts (a move that Nigerians remember well from previous downturns). In October, the IMF World Economic Outlook forecast that the Nigerian economy will shrink by 1.7% this year, and only grow by 0.6 of one per cent in 2017.
The banking sector in Nigeria is also feeling the pinch as businesses fail, thereby triggering a surge in non-performing loan in the country’s banking sector. The banking sector is also experiencing asset quality depreciation and this has been capped with retrenchments across the industry.
The Way Forward
The current state of the Naira has far-reaching implications for the Nigerian economy and by extension, the Nigerian people. The economy that allows everything to be imported will continue to hurt the Naira as its current account deficits continues to widen. The solution lies in ramping up export earners and cutting down on import demands. Commentators including most recently Bloomberg, argue that t foreign exchange controls must be relaxed, not intensified, to achieve these goals. In any event, external reserves can no longer sustain a currency peg.
The Naira will continue to take a beating from majors until this trend is reversed. If Nigeria can increase domestic production of food and beverages which accounted for around 17% of the total import bill in 2015, pressure on the Naira might abate. This cannot produce results in the short term, but it might create employment and improve liquidity on Main Street.