Despite calls from the International Monetary Fund and the World Bank for deeper changes and protests from firms, Nigeria maintains regulation of its naira, the national currency. A free-floating naira, according to multilateral agencies, will help the economy survive future shocks. However, Nigerian authorities are concerned that inflation caused by a sudden devaluation would push millions of people into poverty even more than it is today. The central bank governor, Godwin Emefiele, denied the country was pursuing a new foreign exchange management scheme last week, while Vice President Yemi Osinbajo said the government would use a more flexible pace. In order to better analyze the situation, the article will review the major facts about naira and recent monetary policy from the government side.
The pressure on the Naira
The COVID-19 pandemic and oil price slump hit Africa’s largest economy, which relies on oil exports for 90% of its foreign exchange earnings, sending it into its second recession in four years. It barely avoided contraction in the fourth quarter, but a fall in oil sales resulted in a $14 billion balance of payments deficit last year, depleting its foreign reserves. President Muhammadu Buhari’s administration, which took office in 2015, has kept the currency excessively elevated as a source to express national pride.
In order to prevent a major official devaluation after the last oil price collapse in 2016, the Nigerian central bank developed a scheme of multiple exchange rates. The Nigerian Autonomous Foreign Exchange Rate Fixing, for example, is a market-determined rate for buyers and exporters (NAFEX). The government is seeking a $1.5 billion loan from the World Bank to cover a 5.6 trillion naira ($15 billion) budget deficit this year. However, the World Bank expects Nigeria to do more to align the official exchange rate of 381 nairas to the dollar with other prices, such as NAFEX.
The official rate of the naira was devalued twice last year by Nigeria’s central bank, weakening the exchange rate for retail users. After the devaluations, the bank has been increasingly adjusting the currency, restricting dollar access for imports, and introducing stringent forex policies to sustain the naira. Nigeria lifted interest rates to lure buyers after oil prices plummeted in 2014-16. However, after oil prices fell last year and foreign investment fled, the central bank cut treasury bill yields to increase the liquidity of the naira.
It is no surprise that the current economic situation and the national currency rate in Nigeria is a deterrent factor for the businesses and investments. However, surprisingly, it gives better opportunities for those who are involved in the forex market or the crypto-industry as the rate is fluctuating a lot. As a result, we face the increased demand for best online Forex trading brokers in Nigeria has dramatically increased. The dollar is quoted at 465 nairas in 12-month non-deliverable forward contracts, implying that the local currency is reportedly overvalued by about 18 percent.
When the currency is pressured to change, Patrick Curran, senior economist at emerging markets consultancy Tellimer, says it almost guarantees a loss on investment until returns outweigh the overvaluation. Nigeria’s debt is among the lowest-yielding in Africa, which the government is relying on to meet this year’s high funding needs by low-cost domestic borrowing. However, even if the currency problems are overcome, the historically low yields will discourage new inflows, according to Samir Gadio, head of Africa strategy at Standard Chartered Bank. Because of the low returns, foreign investors have dumped local properties.
Due to the current situation, to reduce imports, the central bank has provided low-cost credit to support manufacturing and agriculture. Since the naira plunged sharply on the black market, it also relaxed rules on diaspora remittances in order to increase dollar liquidity. So far, those interventions haven’t helped the economy, but the central bank has effectively sacrificed development on the altar of naira stability. This strategy has struggled to achieve the declared target of low and steady inflation, instead of exacerbating price rises by foreign exchange shortages and market deflation. Analysts predict that without a substantial increase in oil prices, the expense of imports and meeting offshore debt commitments would deplete Nigeria’s dollar reserves even further.
Summing It Up
Finally, to sum up, the situation in many countries in the post covid period is very different from the previous years. However, we cannot blame the current economic conditions in Nigeria only for the covid pandemic as the inflation in the country is going on for several years now. The reason for this might be mentioned to be the wrong planning of the economy or the unexpected events, but the pandemic had definitely influenced the economy as well.
This is due to the fact that even the USD was facing the rate of inflation and it had an effect on every currency, as well as on the naira. Moreover, to overcome the problematic conditions, the national bank has come up with the idea to reduce the import in order to promote the manufacturing and agriculture in the domestic market. In order to reduce the inflation rate in Nigeria, economists and experts believe that the main key will be to increase the oil price which is the major source of export from the country with a lot of benefits.
