A year is a very long time in all but financial markets, especially the forex market where every change in price counts.
This time last year the exchange rate between the naira and dollar was about 503/$1. At the time Nigerians were astonished as no one ever believed the exchange rate will depreciate this bad. The last time the exchange rate had crossed N500 was in early 2017 when it breached that ceiling only to come crashing down after the CBN launched the I&E window.
That’s such a long time now and as we have come to see, it only took a few more months to get to N580/$1 by the end of the year.
Fast forward to today, the exchange rate is N610/$1, with over N100 added within a year. It’s an astonishing development which seems unlikely to abate anytime soon.
So how did we get here?
- When trying to consider how the exchange rate suddenly ballooned over N600 to the dollar, one would immediately recall the ban by the CBN on the sales of forex to BDC operators in the country.
- Before the ban by the CBN, the exchange rate was trading around N500 to a dollar. However, in less than three months, the rate had soared to N573 by September of the same year.
- Meanwhile, before the ban on the BDCs, the CBN had extended its Naira4dollar scheme for diaspora remittances, which it introduced in March of the same year in a bid to spur growth in diaspora remittances.
- The Naira4dollar scheme offers recipients of diaspora remittances N5 for every $1 received through CBN IMTOs.
- Unfortunately, this scheme is yet to materialise into more liquidity in the Nigerian economy with the exchange rate facing further depreciation.
- Later in the year, seeing the depleting foreign reserves the Nigerian government raised $4 billion from a Eurobond issuance in September 2021 coupled with a $3.3 billion IMF infrastructure, which pushed Nigeria’s foreign reserve above the $41 billion threshold.
- Despite this growth seen in the country’s foreign reserve, it is shocking to see that the reserve has fallen below $39 billion in less than 7 months.
Why this matters
The various moves by the CBN to attract forex into the country have not yielded positives in terms of our current exchange rate. Some economists and analysts will however argue that Nigeria’s exchange rate problem is not totally monetary, but cuts through the fiscal side.
For naira to record some stability, the CBN will require a significant amount of FX inflow in order to meet up with pent-up demands, either through Eurobond issuances (which come at a high cost), or improved FDIs, FPIs, and diaspora remittances.
However, the current rates justifies the demand for foreign currency in dollars, which would have been compelled by the growth rates affecting the economic cycle in rebalancing the impart the Eurobond had on both monetary and fiscal policies. conundrum. CBN set the seen in a Dollar versus EURO in the boxing ring to achieve trading influence over Dollars at the time,
the quarter return on deficit account balance was met. Other agents playing a role to deflate overheating the economy into
temporary recession. Hypothetically, the NAIRA is in free fall again to booster faster local economies. If M4 policy were in place to determine the aggregage demand for export funding at a lower base rate, then the current trends in somewhat, steadily increasing inflationary pressure would have been curtailed to decrease the upsurging NAIRA. The retail sector will have to meet the brunt of NAIRA spread to achieve the CBN target of 500 to 1 at last year’s rate. The vice president has suggested creating a dollar account for overseas remittances direct, for NAIRA exchange to control the liquidity measure of M4 aggregate demand. Overall, the CBN governor will take charge on events taking place in Europe post-brexit to hedge for surplus euro current account.