Naira woe continues in 2024, lists in 2023 world’s worst currencies

Business a.m

A recent Bloomberg report on the global currency market has shown that the Nigerian naira has been one of the poorest-performing currencies in the world in 2023 and is projected by analysts to continue to depreciate in 2024.

According to the report, the local currency plunged about 55 percent  in 2023 to N1,043 per dollar, making it the third-worst performer among 151 currencies, following the Lebanese pound and the Argentine peso.

The Bloomberg report attributes the naira’s depreciation to a number of factors, including the Central Bank of Nigeria’s (CBN) decision to allow the currency to trade more freely and the removal of subsidies on petrol.

These changes have had a negative impact on the naira’s value, which has been further weakened by the fact that Nigeria’s foreign reserves are at their lowest level in six years and most of them are encumbered by outstanding short-term debts.

Bloomberg quoted a forecast by Vetiva Capital Management Ltd suggesting that the naira could slide further unless President Tinubu’s administration attracts more foreign investment or increases oil production.

This, it noted, underlines the need for the Nigerian government to take a proactive approach to strengthening the naira, either by attracting foreign capital or diversifying its economic output.

In its analysis, Vetiva Capital Management stated that further devaluation of the naira, combined with tighter monetary policy, is necessary to reduce imbalances in the foreign exchange market. It also noted that a significant increase in foreign exchange reserves, higher foreign exchange inflows, and a reduction in the money supply would all be positive factors for the naira.

The Central Bank of Nigeria’s (CBN) data shows that the country’s foreign exchange reserves fell to a six-year low of $32.87 billion at the end of December 2022.

This decline is partly attributed to the CBN’s efforts to support the naira by selling dollars, which has had the effect of depleting the country’s foreign exchange reserves. However, the CBN’s intervention in the currency market has not been sufficient to stem the naira’s depreciation, which is causing major challenges for Nigeria’s economy.

Kyle Chapman, an FX markets analyst at London-based Ballinger & Co Limited, said the naira’s poor performance in 2023 has been caused by a number of factors, including a backlog of unsettled forwards (contracts to buy or sell assets at a set price in the future), unfulfilled promises of dollar inflows, and inflation reaching its highest level in two decades.

In an effort to defend the naira, the Central Bank of Nigeria (CBN) has depleted its foreign exchange reserves. These reserves reached a peak of $47.63 billion in June 2018, but by December 2023, they had fallen to $32.87 billion, a level not seen since September 2017.

According to Chapman, the naira’s decline is likely to continue throughout 2024, and its ultimate value will depend on whether the CBN’s policies are successful in attracting more U.S. dollars to Nigeria and restoring confidence in the official market.

In response to the naira’s decline, CBN governor Olayemi Cardoso has said that he will allow market forces to play a larger role in determining exchange rates while setting clear and transparent rules for market operations. 

Chapman says that if these measures are implemented and President Tinubu’s government takes steps to boost oil production and attract foreign investment, there is the potential for the naira to rebound from its record lows. However, it is still unclear whether these changes will actually be implemented and have the desired effect.