Why the naira is falling

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.

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.

“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.”