It is no longer news that the plunging oil prices have increased pressure on the naira.
Africa’s largest economy exports mostly crude oil, but it spends its foreign earned currencies on supplies abroad for basic items such as food, wears, electronics, and refined petrol. According to Nigeria’s foreign trade report, in 2019 alone Nigeria spent about N16.959 trillion ($47 billion) on imports compared to N13.1 trillion ($36.5 billion) a year earlier. It spent about $28.7 billion on invincibles (spend on services such as professional fees, financial services, business travel, medical tourism, etc.)
This illustrates how Nigeria imports everything, since Nigeria produces less locally, thereby increasing demand for the dollar needlessly; importers need American dollars to pay for goods bought abroad, causing depreciation of Nigeria’s local currency. Though the disparity between the official rate and parallel market rates has narrowed to about 10%, the naira is still experiencing pressure from the strong dollar.
Since the start of the COVID-19 pandemic, the value of the American dollar has reached record highs, as many investors around the world are rushing to have a part of it.
(READ MORE: Naira hits N500 to $1 at the forward market)
According to the International Monetary Fund, the American dollar is still the most popular currency. As at Q4 of 2019, it made up about 60% of all known central banks’ foreign exchange reserves.
In a phone chat with Nairametrics, Philip Anegbe, Team Lead CardinalStone Research explained in detail the strains being faced by the naira. He said:
“The case for further Naira re-pricing is strong. Nigeria is facing a twin deficit crisis across its fiscal and current account books and these deficits are likely to get wider with the weak oil price and production.
“The sad part is that we are not seeing enough inflows via the financial accounts that can help bridge the gap in the current account of the balance of payment.”
(READ MORE: Naira crashes to N450 to $1 at parallel market amid fx scarcity)
He went on to discuss the challenges Nigeria will face in getting loans to balance its economy. He continued by saying:
“Nigeria is looking to obtain over $6 billion in funding from World Bank, AFDB, and IMF as well as debt services relief on previous foreign debt.
“We believe the government is unlikely to obtain all the foreign borrowing it needs to plug the deficit.
“Via the IMF’s RFI (Rapid Financing Initiative), there is a chance Nigeria may be unable to draw down 100% of its target $3.4 billion. Other African nations that have traveled this route were able to draw down around 50% as well. So, we prefer to keep a cautious stand on this front.
“If the needed amount of inflows is not obtained via external borrowings, FPI flows, or FDIs (there is significantly little chance of getting material FPIs or FDIs because of the weaker macros and oil prices), the CBN could result to significant drawdown on reserves and may eventually bow to a devaluation when it runs out of armory to defend the Naira.”
(READ MORE: Many odds against the naira)
Furthermore, a look at the Nigerian industrial sector shows that higher import costs, coupled with a fall in the foreign exchange reserves standing at about $33.9 billion as of 23rd April 2020, are increasing local production costs, spurring domestic inflation thereby depreciating the naira.
Victoria Njimanze, an investment analyst at a leading investment bank explained in details why the dollar is having a stronghold on the naira, she said:
“Currently, more than 60% of foreign bank reserves are denominated in U.S dollars. It is also tagged as a haven currency as it is perceived to be less risky compared to holding local currencies (which during crises experience capital outflows) and often appreciates in a period of economic downturn. Because it is considered a haven during times of global economic uncertainty, the demand for dollars can often persist despite fluctuations in the performance of the U.S. economy, hence we see investors take shelter in the U.S. currency, given the current blow dealt on world economies by the COVID-19 pandemic.”
(READ MORE: Naira depreciates further against dollar, pounds sterling over liquidity crisis)
She emphasized on how investors are trooping into the US dollar saying
“Given the trend in the oil market, the US (United States.) dollar rose against a basket of major currencies amid the sharp drop in oil prices, as investors move to haven assets. As lockdown continues and factories stay closed with travel restrictions, oil prices continue to dive lower due to low demand, it draws money from risk assets to the safety of the US dollar and its denominated assets.
“We, therefore, expect to see the voracious demand for dollar soaring on the back of current turbulence in the market as investors continue to stay risk-averse. All current happenings should be negative for the US dollar, but it may be worse for the rest of the world as there is no global recovery without a US recovery.
“In conclusion, the greenback will continue to draw its strength from risk aversion.”
The major bane of the Naira is that Nigeria has what is termed “single product” (oil exports) economy, which it relies heavily on for its foreign currency earnings. Couple that with the country’s humongous imports which is spurred by its citizens’ insatiable appetite for foreign products and you’ll get the picture.
Indeed, the fate of the Naira rests solely on the laws of demand and supply.
Based on current and the near future’s micro and macro economic factors, I personally foresee an exchange rate of #575:$ in the near future.
You are on point
Nigerian government and the entire CBN is penny wise pound foolish. The Nigerian economy requires more than crude oil ? to make the Náírà stronger. Take the government back to grassroots when it used to be agriculture before oil was discovered. They should learn from this crisis. Period!
Actually my brother u re making a great point, if we have u all in this country things will be more better than this……
Take a look at when 2pound was equal to 1naira that was without crude oil. now crude oil us discovered it should be stronger than B4.
Brother it as come to a point were Nigerians youths should stand up to raise their voices B4 Nigeria will fall deeply. Look at Ghana in terms of currency rate. we’re the gaint of Africa best on what now we are falling & government as no prove of what is going on.
Giving Nigeria government what they need from us is just like a baby crying for biscuit,but can’t give even an half to the giver, people for government & government for the people…(is a lie nowadays) let our youth make this slogan comes to reality, I believe physical count down vote with the contestant can solve this… making physical vote giving a list of what should be done in our country is a proper thing(life when is done or hang to dead if not done) on like USA that what happening. The youth have the power to devote any kind of government contestant in any position, because without the massive there can’t get their selves they…but after that the will use the money to fly out. Task payment in were there re traveling & building in is for the beautification of that country. Please Nigerian government should think well is albout selling all our crude oil.
Fine you sell it use the money to build were you can also manufacture it for the benefit of this country & hard will calm down in terms of pertrol & kerosine that example1.
Government think wise cries is more than laugh in our country.
The exports are not well recorded, Nigeria exports way more than oil.
Our borders and internal markets are not taken into consideration by the so called exchange watchers and commodity transaction monitors.”if we have them.”
We export nothing less than 500trailer loads of food items to neighboring countries everyday. Exchange with French francs.in millions. Illegal solid minerals transaction is also unmonitored.with customers from all-over the continent. Trading in Gold and all manner of precious stones.
We only have lazy and uncanny people.mannang the exchange and commodity markets. Who didn’t know to monitor all incoming currency and export power of the nation.we could not have been “bashed”, Naira wise by the (round tripping ) cyndicates. Who have been helping their paymasters, rather than the nation. Thereby making billions overnight. From hideandskin,groundnuts,ginger,sameseed,cashue nuts, cotton etc.beans, maizes, local rice daily going out in millions of toans through various border openings,un accounted. Not recorded.
You are on point bro. There are people enriching theirselves from these poor record keeping if not I think if the proper thing is done the naira will be at par with the dollar Ok take a look at Libya what are they really producing apart from the same oil but with proper recording and transparency their dinar is almost equalling the USdollar.
Take a look at when 2pound was equal to 1naira that was without crude oil. now crude oil us discovered it should be stronger than B4.
Brother it as come to a point were Nigerians youths should stand up to raise their voices B4 Nigeria will fall deeply. Look at Ghana in terms of currency rate. we’re the gaint of Africa best on what now we are falling & government as no prove of what is going on.
Giving Nigeria government what they need from us is just like a baby crying for biscuit,but can’t give even an half to the giver, people for government & government for the people…(is a lie nowadays) let our youth make this slogan comes to reality, I believe physical count down vote with the contestant can solve this… making physical vote giving a list of what should be done in our country is a proper thing(life when is done or hang to dead if not done) on like USA that what happening. The youth have the power to devote any kind of government contestant in any position, because without the massive there can’t get their selves they…but after that the will use the money to fly out. Task payment in were there re traveling & building in is for the beautification of that country. Please Nigerian government should think well is albout selling all our crude oil.
Fine you sell it use the money to build were you can also manufacture it for the benefit of this country & hard will calm down in terms of pertrol & kerosine that example1.
Government think wise cries is more than laugh in our country.