Once again, the crash of Naira, Nigeria’s currency!

To the chagrin and utter bewilderment of practically all economic agents in the Nigerian polity, the national currency, the Naira, has ineluctably resumed its collapse against the US dollar and other hard currencies in the foreign exchange (FX) market. The currency, which had moved from ranking amongst the ‘worst performing’ globally (early in the year) to number among the ‘best performing’ in April — according to Bloomberg reports — has since May 2024 resumed crashing in the FX market.

In February and early March, the Naira crashed to as low as N1,800/$, but rebounded to as high as N1,072/$ in mid-April; today, however, the national currency has collapsed to about N1,500/$, with a likelihood of further decline in the FX market in the days ahead. Apparently rattled by this turn of events, the Central Bank of Nigeria (CBN) in collaboration with the Economic and Financial Crimes Commission (EFCC) has been combing for FX speculators and ‘illegal’ operators of Bureaux de Change (BDCs) in major towns and cities across the country.

Specifically, a number of operators of ‘unregistered’ BDCs were (between Friday, May 10 and May 13) raided and arrested in various locations by the operatives of EFCC in Lagos, Abuja, Port-Harcourt, Kano, Kaduna, among other places. But what has been playing out in the FX market in recent weeks has been increasing illiquidity — scarcity of the US green back. Indeed, by Thursday, May 9, only $84 million was officially available — and this was just half of the previous day’s supply of only $168 million in the FX market. The supply has continued to shrink — and keeps heightening the volatility in the FX market.

The CBN had in February and March, in a bid at fighting runaway inflation (with the rate standing at 33.20% at end-March), cumulatively raised the Monetary Policy Rate (MPR) by 600 basis points (to 24.75%). This immediately created a high interest rate environment in the Nigerian financial market — and the apex bank latched onto this to attract foreign portfolio investors (FPIs) by selling Treasury Bills via an Open Market Operation (OMO). Apparently, the ‘hot money’ so attracted from the FPIs was quickly deployed in the FX market to ‘defend’ the Naira.

In addition to hiking the MPR, the CBN had also ordered the prohibition of Foreign Currency Collaterals for Naira loans from Deposit Money Banks (DMBs). The apex bank also directed International Money Transfer Operators (IMTOs) to align their exchange rates with prevailing market rates at the official FX market. However, all these notwithstanding, sooner than later, the FPIs began ‘cashing out’ or pulling out, as the Nigerian market kept displaying uncertainty in the face of policy inconsistency and somersaults.

This trend is vividly exemplified by the introduction of the controversial cybercrime levy early May by the apex bank, and its suspension by the President, Bola Ahmed Tinubu — following the furore and public odium the tax generated. The net effect of the diminishing FPIs has fast been reflecting in the re-emergence of shortage of FX in the market; and hence, the continued weakening of the Naira.

Undoubtedly, the relapse of Naira crashing in the FX market is yet a strong pointer to the absence of fundamental FX liquidity (supply) policies. And truly, the only sufficient condition for strengthening the Naira is consistent increase in FX liquidity which is only possible through improved oil and non-oil exports and foreign capital inflow — mainly via FPIs and Foreign Direct Investments (FDIs). Each of these sources, unfortunately, is hampered by a number of challenges.

Crude oil production and export is still laden with a multiplicity of problems, resulting in sub-optimal performance. Although Nigeria’s Organisation of Petroleum Exporting Countries (OPEC) quota is about two million barrels per day (mbpd), at no time in recent years has the country been able to hit the quota. In fact, although the Appropriation Act 2024 is based on oil production level of 1.87 mbpd, actual production volume in each of the first four months of the year (2024) has been hovering around 1.30 mbpd.

The now dreaded oil theft is yet ravaging the sector — with as high as 70 to 80 percent of crude oil produced in the country (per time) said to be lost to thievery. Widespread vandalism on oil pipelines and other installations remains largely unchecked. To these will be added willful and organised sabotage of oil assets across oil producing communities and locations. Ongoing exit of most international oil companies (IOCs) from the country, especially from onshore operations, is rather shrinking existing and potential investments in the crucial oil sector.

At all times, the total dependence on imported refined petroleum products for all local needs (especially of Petroleum Motor Spirit, PMS) has remained a heavy drain on Nigeria’s available FX. Since the announced removal of fuel subsidy by President Tinubu in May 2023, and the licensing of importers of PMS, the activities of the importers on the FX market has always been weighing the Naira down. Till date no local refinery produces/supplies PMS for Nigerians’ use — leading to intermittent shortage of the product and continuous rise in its prices. At present, there is a lingering PMS scarcity across the country. 

On the other hand, FDIs remain elusive to Nigeria for several reasons, including general insecurity in the land, harsh business environment (especially poor infrastructure), low ranking ‘ease of doing business’, among others. Indeed, rather than attracting foreign investors, many multinational companies, owing to the asphyxiating business climate in Nigeria have been leaving in droves. Whether in the pharmaceuticals industry, the oil and gas sector or general consumer goods business, many companies have been relocating away from Nigeria.

The FPIs bring in ‘hot money’ and temporarily so; and can therefore not provide real succour to Nigeria’s FX-starved market. This, in part, accounts for why the recent CBN propping of the Naira in the FX market from the FPI proceeds was short-lived. At present, some of the FPIs that came in one or two months ago, are already repatriating their capital and gains — thus, depressing the Naira — and sustaining market volatility.

Regarding non-oil export, there is no standing articulated overarching initiative of the federal government to optimise gains from the sector. Some banks and business groups have their specific export trade motives and methods. However, until the full floatation of the Naira mid-June last year (2023), the CBN had a productive non-oil export initiative tagged ‘T-200’ — under which $200 billion proceeds was targeted in two or three years. This was jettisoned alongside the multiple exchange rates regime in the FX market; and is yet to be restored or replaced.

Nigerians’ almost insatiable preference for foreign goods and services remains yet another drain on the scarce FX stock of the nation. To a very large extent, Nigeria is still an import-dependent economy — in terms of finished goods, intermediate and luxury items as well as machinery and equipment. At all times, therefore, a huge chunk of Nigeria’s FX inflow is frittered away through massive importation, even of items that have durable local equivalents or substitutes.

All these account for the unsteady or unsustainable supply of FX by the CBN; more so, since the apex bank hardly made any draw-down on the nation’s stock of external reserves to ‘defend the Naira’. The CBN governor, Olayemi Cardoso has explained at several fora that the bank had never resorted to the use of the external reserves in its FX supply. Rather, recent draw-downs on the reserves were deployed to servicing the nation’s huge public debt.

The CBN, and indeed, the Tinubu-led government must return to the fundamentals to address the challenge of poor FX inflow into the country holistically. The current scenario in which the CBN’s effort remains in its ‘silo’ while the central government largely exhibits a laissez-faire attitude towards improved and sustainable FX inflow is unhelpful. Dishing out a plethora of policies — on a trial and error basis — will not achieve the desired results, nor will it inspire the much-needed confidence of local and foreign investors.

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