The Nigerian Naira race against the US Dollar   

Oluwatosin Oladetan, (ACCA, PMP, NIM), an actuary, business and corporate strategist, financial analyst and process improvement professional, is a Volunteering Contributing Analyst

The Nigerian foreign exchange window has experienced increased volatility resulting in an adverse economic outlook after the Central Bank of Nigeria (CBN) abolished the different exchange windows and adopted the Investors and Exporters (I&E) Window as the sole medium for processing all foreign exchange transactions in June 2023. The I&E window currently operates on the model of the Willing Buyer, Willing Seller. The operational rate for all government related transactions is two decimal places weighted average rate of the preceding day’s executed transactions at the same window. To promote transparency and liquidity of the I&E window, the order-based two-way quotes having a bid-ask spread of one naira was to guide transactions and the order book was to promote seamless trade execution.

The CBN also ceased the ‘RT200 Rebate Scheme’ and the ‘Naira 4 Dollar Remittance Scheme’ in June 2023. The CBN lifted the restriction on providing foreign exchange to importers of about forty-three items previously banned as of 2015. The CBN also committed to accelerating efforts to clear the FX backlog with existing participants, attain a single FX market rate, promote opportunities for manufacturing companies to access foreign exchange, boost price stability, reduce inflationary impact on the cost of goods and services transacted in the Nigerian naira and improve standard of living of the average Nigerian.

A situation to worry about is that despite the advancement of policies from the government on maintaining a stable exchange rate, rather than there being a unification of the foreign exchange rate the arbitrage between the two major foreign exchange market (I&E Window, Parallel Market) has not reduced to a minimal figure or zero. There are factors contributing to the arbitrage experienced after the re-introduction of the willing buyer and willing seller modus operandi. Between June 2023 when the policy was reintroduced and October 2023 the average foreign exchange rate of the Nigerian naira to the United States dollar has depreciated by 21.58 percent from ₦615:78/$1 to ₦785:19/$1 on the I&E Window, the currency depreciated further on the parallel market by 34.26 percent from ₦756:00/$1 to ₦1,150:00/$1. This adverse state of the exchange rate is due to contributing factors such as the country’s balance of payments, trade balances, capital inflows, lower supply of foreign exchange against the demand within the market.

The national foreign exchange reserves have been on a downward trend as there was a depreciation of 2.53 percent from $34.12 billion to $33.26 billion between the balance as of June 30, 2023 and October 20, 2023. The foreign exchange reserves went low despite the fact that the major source of income to Nigeria, crude oil, had its production increased by 6.79 percent from an average of 1,260,928 barrels per day (bpd) in June 2023 to 1,346,562 bpd as of September 2023 due to government support and incentives to reduce oil theft and vandalism of the pipeline. The average price of brent crude per barrel also increased by 19.32 percent from $75.10 as of 30 June 2023 to $89.61 as of October 24, 2023. Natural gas, which currently accounts for the Nigeria second largest export revenue line-item (9.11%) as at Q2-2023, price increased by 14.12 percent from $2.55/MMBtu as of June 30, 2023, to $2.91/MMBtu as of October 24, 2023. The total foreign capital domiciled in Nigeria declined by 32.90 percent from $1,535.35 million in Q2-2022 to $1,030.21 million in Q2-2023, and there was also a decline of 9.04 percent from $1,132.65 million in Q1-2023 to $1,030.21 million in Q2-2023. Portfolio investment experienced the greatest decline of above 83 percent on a year-on-year and a quarter-on-quarter basis, despite the significant increase in the inflow of other investment (trade credits, loans, currency deposits, other claims). The United States of America accounted for the greatest share (26.39%) of foreign funds domiciliation into Nigeria. Nigeria recorded the second highest trade surplus between 2019 to date in Q2-2023. The surplus recorded in the period was because of the increase in the crude oil price per barrel and further depreciation of the naira against the US dollar despite the significant decline in volume of crude oil exported. The Nigeria trade balance as of Q2-2023 positioned at ₦1.289 trillion was 7.19 percent lower than the highest trade surplus of ₦1.389 trillion surplus over the same period. The non-crude oil export percentage in Q3-2019 is more than double the same percentage in Q2-2023. The total Nigerian public debt almost doubled in naira terms due to the devaluation impact of the naira as the balance dipped 75.29 percent from ₦49.85 trillion in Q1-2023 to ₦87.38 trillion in Q2-2023 while the USD equivalent only moved slightly by 4.73 percent from $108.30 billion in Q1-2023 to $113.42 billion in Q2-2023. The debt obligation of the Federal Government of Nigeria (FGN) experienced the most spike among the various classes of debt between Q1-2023 and Q2-2023.

The Nigerian real gross domestic product (GDP) experienced a year-on-year growth of 2.51 percent from ₦17.286 trillion in Q2-2022 to ₦17.719 trillion in Q2-2023 despite the (1.94%) decline in the industries sector as the services sector contributed the most at 4.42 percent. The nominal GDP grew year-on-year by 15.77 percent from ₦45.004 trillion in Q2-2022 to ₦52.104 trillion in Q2-2023. The total federation revenue for Nigeria was 29.85 percent down from the budgeted revenue of ₦2.847 trillion for the first quarter of 2023 majorly driven by the slow revenue generation from the oil sector. Of the total ₦1.997 trillion revenue recorded for Q1-2023, the contributions from the different sectors are as follow: Value Added Tax (VAT): 37 percent; Company Income Tax (CIT): 25 percent; Custom & Excise Duties: 19 percent; and Oil Revenue: 15 percent. The federation excess crude account did not experience any withdrawal within the first quarter. The excess crude account maintained a closing balance of $0.47 million between January 2023 and March 2023. The total income for the federation inclusive of exchange rate differences and excess bank charges for the year 2023 first quarter was ₦1.210 trillion. It is very important to note that the total recurrent non-debt expense for the same period was ₦1.243 trillion: 102.78% of revenue, the total recurrent debt service inclusive of the interest on ways & means was ₦2.229 trillion: 184.32% of revenue, the total capital expenditure inclusive of the capital development fund (main)-2022 spent in 2023 was ₦2.068 trillion: 170.97% of revenue. The federation facilitated a borrowing of ₦2.030 trillion through FGN domestic bond borrowing to result in a net budget deficit (excluding government owned entities budgets and project tied loans) at (₦2,300.98 trillion). The federal government placed more priority on fulfilling her non-discretionary obligations rather than seeking opportunities to increase revenue in foreign exchange even as the revenue generated within the period could not cover a huge portion of the cost emanating also within the period.

Most analysts and investors’ confidence in the stability of the Nigerian naira has weakened since the re-introduction of the willing buyer willing seller exchange rate model from the Wholesale Dutch Auction System-Spot (WDAS-SPT) since the naira has dipped to an all-time low rate against the US dollar. The situation will worsen further if the government does not take active steps to resolve the anomalies.

The following initiatives can assist the federal government of Nigeria and the CBN attain the harmonisation of the foreign exchange rate.

• Attraction of high foreign exchange deposit not restricted to the $10 billion inflows expected in the next few weeks to ease liquidity as stated by the finance minister
• Increase in the volume of crude oil and non-crude oil export to stimulate higher inflow of foreign exchange into the nation as income
• Increase transparency in the trading of foreign exchange through the appropriate regulation of the trusted parties empowered to conduct the FX trading such as Deposit Money Banks, Bureaux De Change, among others
• Increased administrative efficiency in the processing of foreign exchange transactions at the designated centres
• Reduction in incurring further foreign debt and other obligations while deploying appropriate administration on existing obligations to reduce the risk of default
• Incentivising investors in the diaspora to increase capital importation of foreign exchange across sectors within the nation.
• Deploying automation in the processing, allocation, and settlement of foreign exchange to reduce the administrative cost of cash based foreign exchange transactions

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