Whenever the story of the Nigerian “great recession” of 2016 is told by historians in years to come, the plummeting exchange rate of the naira against the dollar will be considered as a major catalyst for what is a dark period in Nigeria’s economic history.
The year 2016 will also go down as the year where the naira was raped nonstop and left for dead by those who were supposed to protect it the most. The exchange rate as we all know today has depreciated from as low as N165 in June 2014 to as low as N390 (black market) in August 2016.
The chart above provides a unique insight into where the Central Bank of Nigeria lost grip of the exchange rate. As you can see, the disparity between the interbank and BDC rates was narrow as the CBN’s external reserves position looked relatively strong above $40 billion. However, by December 2014 the Central Bank made it first monetary policy pronouncement to “defend” the naira by devaluing the exchange rate. The disparity widened a little bit more but still within appreciable levels.
The trouble however started in February 2015 when the Central Bank introduced its first set of capital control policies that was meant to restrict the demand for dollars. The result was devastating as February turned out to be the worst for the Naira in 5 years.
Next was in June 15, when the CBN banned the sale of forex for import of 41 items ranging from toothpicks to indian incense. The disparity got a bump rising above levels not seen in recent years. Average exchange rate at the BDC hit N225 highest since February 2015.
However, things went from bad to worse around December 2015, when the CBN cut the amount of dollars it sold to the BDC’s from about $30,000 to under $10,000 per week. This introduced a new wave of scarcity that widened the disparity between the interbank (that was still fixed) and the BDC segment. Rates at the BDC segment ballooned to about N267 while the CBN maintained its N197 exchange rate policy.
The Naira hit another major low in January 2016, when it went a step further from limiting the amount of dollars it sold to the BDC’s to how outrightly banning them from accessing forex. That would lead to the first time ever the naira will be exchanged for as high as N305 against the dollar at the BDC.
It was a watershed moment for the naira and by extension Nigeria’s economy as at that point, the CBN lost full control of the exchange rate. The CBN then issued further circular explaining that it prioritized some imports (such as petroleum products, school fees, medical tourism etc.) over raw materials and other inputs required by businesses to thrive.
In the same month, the CBN restricted the usage of debit cards by Nigerians abroad and then followed by another rumour that demand coming from medical tourism and school fees could also be restricted, leading to a surge in demand for the green back. The exchange rate plummeted to about N325 by February 2016 at the BDC segment whilst the official rates remained at N197.
By May, things had gotten out of hand as latest macro-economic results pointed a looming recession, glaring stagflation and a dip in the Nation’s external reserve position. The CBN had lost its battle to save the Naira and had no choice but to give in. This ushered in the new flexible exchange rate policy which saw the naira being floated for the first time ever against major currencies around the world.