Further Economic Woes as Naira Falls to Record Low

There are indications the Naira will continue to depreciate throughout this year and the uncertainty that surrounds the 2023 elections suggests further economic travails lies ahead for a country beset by capital flight.

It is not surprising that the exchange has weakened in the parallel market, with the market shedding about 19.10 percent, (previously N422.10 on January, 4) since the start of the year, according to data gathered by United Capital.

However, the Investors’ and Exporters’ (I&E) Window remains relatively stable at N468 as the central bank clings on to restrictive foreign exchange policies.

The Naira to dollar exchange rate has dropped to N710/$1 rate on Tuesday September 6^th, 2022, which represents a 0.43 percent depreciation.

“Going forward, we have a bearish outlook for the forex situation, given the unexpected capital flight from the Nigerian economy,” said analysts at United Capital.

Since 2016 when a precipitous drop in crude oil price of Mid-2014 tipped the country into its first recession in 25 years, the currency has been deteriorating. The impact has been devastating for a country that crude oil accounts for 90 percent of foreign exchange earnings and two-thirds of government revenue.

Analysts have heaped blame on the central bank governor imposing capital controls, banning some forty something items from the official foreign exchange market in a bid to manage the country’s foreign exchange reserves.

The situation was worsened by the coronavirus pandemic that paralyzed business activities across the country as the government imposed a lockdown policy to curb the spread of the virus.

Of course, manufacturers are the hardest hit from the currency crisis as they are finding it difficult to import raw materials, plants, and equipment to meet production. Consequently, some have closed shops, which compounds the woes of a country where over 50 percent of the population of 200 million live on less than $1.98 a day.

Of course, foreign investors have dumped Naira assets with celerity as they fret difficulty repatriating their money out of the country, which beckons on policymakers to find a solution to the currency debacle.

To exacerbate the already anemic situation of the country is the hawkish tone of global central bankers who are all out to tame rising inflation stoked by the Russia and Ukraine war that has balloon energy and grain prices. A rise in bond yields due to rising interest rates in developed countries means investors dump emerging markets and developing countries assets to seek better yields or return on rich countries’ assets.

Capital imports were abysmally poor at $1.50 billion in the second quarter (Q2) of 2022, 55 percent lower than the average of 2020, according to data from United Capital.

Analysts at United Capital say Nigeria’s fiscal framework government policy direction to continue fuel subsidy payment means that dollar inflows will be used to settle the government obligations regarding subsidies before the residual amount is channeled to the federation accounts.

“Although pump prices have increased in recent months, the FGN and petroleum bodies remain the major importers, which continues to weigh on dollar inflows,’’ summed the analysts.