The Naira (NGN), Nigeria’s national currency, is experiencing persistent devaluation, contributing to the country’s economic instability. This ongoing devaluation could potentially have a minor ripple effect across the continent, amplifying existing economic challenges.
Understanding the depreciation of the Nigerian currency
In a span of just 51 years, the naira, the currency of Africa’s largest economy, has witnessed a staggering depreciation, losing 99.96% of its value. This consistent decline can be attributed to various factors, including the chronic shortage of dollars within Nigeria’s financial system. Additionally, inadequate management practices and an imbalanced trade balance have contributed to the currency’s devaluation. The dwindling revenues from oil, a cornerstone of the Nigerian economy, are particularly exacerbating the currency’s downward trajectory.
Exchange rate reform
Against the backdrop of a sharp depreciation of the naira, Nigeria is undertaking reforms aimed primarily at unifying its segmented exchange rates. This initiative should have been launched at the first sign of significant devaluation of the local currency. However, the previous executive was reluctant to act, fearing the impact of higher import prices on Nigerians’ standard of living.
The Central Bank of Nigeria (CBN) is playing a pivotal role in this endeavor by actively intervening in the foreign exchange market to enhance liquidity. Additionally, the institution is implementing measures for monetary tightening to stabilize the local currency’s value. Notably, the CBN has eliminated exchange rate caps and embraced market-based limits to promote transparency.
This policy shift towards market-driven exchange rates is anticipated to foster increased competition in pricing for international remittances. Despite these concerted efforts, the naira continues to depreciate, and the disparity between the official and parallel exchange rates persists.
Declining oil revenues
Nigeria is heavily dependent on the oil sector, contributing 5.67% of its GDP in 2022, according to the National Bureau of Statistics (NBS). Nigeria’s oil industry accounts for around 90% of national exports, and is therefore a major source of foreign currency. Despite a rise in oil prices between 2021 and 2022, the country’s oil production remains low. The drop in revenues will have a direct impact on the country’s already worrying foreign exchange reserves and tax revenues.
Consequences of the devaluation of the naira
The depreciation of the naira in Nigeria is having a significant socio-economic toll. The scarcity of foreign exchange is impeding critical imports, leading to elevated prices and inflation. This devaluation directly impacts businesses and households, leading to increased expenses and diminished purchasing power. Moreover, inflation worsens socio-economic inequalities and heightens the vulnerability of the most marginalized populations.
The depreciation of the naira has triggered a downturn in the Nigerian stock market. In an environment marked by uncertainty and market volatility, many investors are compelled to withdraw their investments. Nigerian startups, which raise funds in USD but generate revenue in NGN, are particularly vulnerable. The devaluation of the local currency escalates their expenses while eroding their profits.
On March 18, 2024, the National Pension Commission disclosed that the devaluation of the naira had precipitated a 56.8% decline in the value of pension fund assets denominated in dollars within one year. By the end of January 2024, this value amounted to USD 14.4 billion, down from USD 33.3 billion in the corresponding period a year earlier. Additionally, the number of retirement savings accounts (RSAs) increased by 3.36% between January 2023 and January 2024, rising from 9.89 million to 10.22 million.
CFA Franc : A popular currency in Nigeria
With the depreciation of the naira, many Nigerians are turning to the CFA franc as their preferred currency. The value of the CFA franc has surged against the Nigerian currency, reaching 2.18 NGN for 1 CFA franc, as reported by the Central Bank of Nigeria. Consequently, there has been a surge in demand for CFA francs within the country, with foreign exchange bureaus now accommodating transactions in this currency.
The appreciation of the CFA franc presents intriguing prospects for investors within the franc zone. However, exercising prudent risk assessment is imperative. Experts caution that the persistent devaluation of the naira will have profound repercussions not only for the local economy but also for the ECOWAS countries collectively.
Future prospects and possible solutions
In response to the ongoing devaluation, Nigeria must implement comprehensive structural reforms backed by robust political determination. Monetary policies geared toward curbing inflation could play a pivotal role in stabilizing the naira. Such measures may involve adjustments like hiking interest rates or managing the money supply.
Moreover, Nigeria should bolster its foreign exchange reserves to fortify its currency stability, potentially through bilateral agreements with other nations or by tapping into new markets. However, the nation must also prioritize economic diversification and reduce reliance on imports, drawing lessons from policies enacted in the 1980s. Economist Aliyu Audu underscores the significance of bolstering local enterprises like Innoson Motors.
Promoting the use of domestically manufactured vehicles can help alleviate import dependence, while fostering local consumption as part of an industrialization drive is strongly advocated. As a tangible illustration, the inauguration of the Dangote refinery holds promise for reducing Nigeria’s reliance on imported refined products in the long run.
