Chronic dollar shortages in Africa’s largest economy have put pressure on the naira depreciating it to about N800/$1 on the black market, according to various media sources.
An increase in oil thefts and a lack of offshore investors means that Nigeria is unable to earn enough forex, a development that has consequently reduced the liquidity of foreign currencies on the Nigerian currency market.
The country loses about 700,000 barrels of oil per day due to the nefarious activities of vandals. This amounts to daily losses of about $60 million for Nigeria. As a result, the FG is forced to break the Fiscal Responsibility Act by having to borrow N8.80 trillion to cover the budget deficit in 2023.
Just last week, the central bank announced it was replacing the N200, N500 and N1000 naira notes targeting corruption and insecurity. The decision has had an immediate impact on the exchange rate even as the naira fell to N775/$1 shortly after the announcement.
Nigeria’s Euro bond yields have not hit junk status with the 10-year bond yield falling to about 14.2% as of October 28, 2022. With bond yields this high, it is unlikely the government can augment its forex needs from the bond market.
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The lack of dollars and the cumbersome procedures by which many Nigerian banks handle their offshore operations have continued to hurt local businesses that rely on forex to fund raw material imports and pay for services. They now resort to the black market to source forex at rates that have contributed to a rise in the country’s inflation rate.
We opine the challenges small businesses now face when sourcing for forex could affect Nigeria’s GDP growth rate if it is not addressed.
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Nigeria it will seem is at an inflection point and to address its dollar needs, the country will need to confront several obstacles most of which take time to be resolved. The country’s high borrowing cost and rising debt burden are inevitable in the efforts by the government to shore up much-needed revenues which have dwindled over the years. However, the implication is that the cost of borrowing is higher and debt service effectively eats into every kobo of revenue received.
The central bank has abandoned its policy of lower interest rates by switching to high-interest rates as tackling galloping inflation becomes a top priority. The decision is unlikely to attract foreign portfolio investors who last time in 2019 bit the cherry when the central bank offered rates as high as 19% for OMO bills in exchange for hot money. Treasury and OMO bill yields hover around 12% much lower than the inflation rate and unlikely to attract foreign investor inflow.
One popular solution among economists is a move towards a market-determined exchange rate as is obtainable in Ghana, Egypt and Kenya. However, this is not a silver bullet as both Ghana and Egypt have shown with their currency crisis. Both countries are taking to the IMF for some form of bailout. While it helps restore investor confidence, it is not enough succour for other deteriorating economic indicators like inflation, high debt-to-GDP ratios and slow economic growth.
The quickest method to achieve this is to decrease imports of goods where we have a comparative cost advantage, such as crude oil. But in Nigeria, quick fixes are often painstakingly slow to implement due to vested interest and government bureaucracy. An oil export-earning country should have no business importing oil but that is where we find ourselves as a country. The Dangote Refinery has long been touted as a major game changer but even that project is not a quick fix.
This leaves oil theft as the only quick fix the government needs to address quickly. The government must fight the oil theft situation head-on with strength and conviction. To confront oil traffickers in the Delta and at sea, they must ensure that the nation’s security services and armed forces have the equipment and reliable leadership they require. Corrupt security officials must be rooted out and tried for theft against the country.
In the short term, the central bank may need to actively intervene more in the foreign exchange market once more, in addition to enhancing rate convergence. The interventions must be targeted and reassuring to the market that it is not a blip. The apex bank may also consider allowing the official rate at the NAFEX market adjusts downwards to the outflow of forex. This will also create more revenues for the government helping address their local debt burdens.
Strong efforts are also required on the demand management side to promote Made-in-Nigeria products, particularly on the fiscal side, in the manufacturers’ sourcing of raw materials, and to end political intervention in the distribution of foreign exchange to qualified end-users.