Nigeria struggles with Naira volatility as exchange rates undermine country’s economy, investors’ confidence.

by Amos Kalu

Investor confidence is impacted by the Naira’s volatility versus the US dollar, which keeps sending shockwaves of anxiety across Nigeria’s economy.

The country’s currency appreciated against the dollar last week, providing a brief reprieve. On the parallel market, it was trading at N970/$1 as opposed to N1300/$1 the week before.

The naira, however, had a poor start to the week, with Monday’s exchange rates ranging from N1000 to N1020/$1. This indicates a minor decline from the N970/$1 exchange rate during the previous weekend.

In the same vein, the Naira fell 4.24 percent at the official FMDQ market, from N780.03/$1 on Friday to N809.02/$1.

Nigeria’s foreign exchange reserves, meanwhile, rose from $33,240 million in September 2023 to $33,340 million in October.

In actuality, since the Central Bank of Nigeria launched the naira on the foreign exchange market on June 14, the currency has continued to fluctuate, raising concerns among those involved in the industry.

Dollar and Naira

In an interview with Channels Television on Monday, financial analyst Kalu Aja shared his thoughts, saying that he didn’t think the Naira could be stable for very long.

“Sales of crude oil are the only factor that determines the strength of the Naira. The currency will continue to fluctuate unless significant shipments of crude oil are witnessed.

Aja’s position is supported by the fact that, according to the National Bureau of Statistics, Nigeria’s sales of crude oil increased to N5.14 trillion in the first three months of 2023 from N4.9 trillion the previous quarter.

Prof. Segun Ajibola, a distinguished economist and past chairman and president of the Council of Chartered Institute of Bankers, said in an interview with newsmen on Monday that the current trend in the foreign exchange market is a sign that a currency is having difficulty determining its fair value in the market.

The Central Bank of Nigeria and the federal government, in his opinion, need to regularly plan to address the foreign exchange supply rigidities if they want the Naira to regain significant strength.

“Everything that is going on with the Naira to US dollar exchange rate is a sign that a currency is having trouble finding a fair price in the market. There is currently nothing to celebrate in the Nigerian forex market, despite the fact that it began to bounce back from a rate of over N1300 to US$ at one point.

In order for the Naira to attain long-term stability, it is imperative to undertake sustainable measures to mitigate supply rigidities. If not, events in Nigeria’s foreign exchange market will be determined by the volatile world oil market. And the exchange rate fluctuations would still be significant, at best.

To maintain a better supply of dollars in the market in the face of an uncontrollably high demand for dollars for imports, non-oil foreign exchange earnings must be tenaciously pursued. Achieving anything less than this would result in unprecedented fluctuations in the foreign exchange market, similar to what has been observed for several weeks.

A money supply that is driven by borrowing, depleting reserves, etc., is only capable of offering short-term support. And therein lays the necessity for us to think creatively when recommending workable plans for handling the nation’s foreign exchange market,” he said.

According to Prof. Godwin Oyedokun, a professor at Lead City University in Ibadan, maintaining the Naira surge at the forex is a difficult problem that needs a thorough solution.

He listed seven steps that the government needs to take to address the volatility of the Naira in the foreign exchange market.

The government can maintain the Naira’s gains versus the dollar by implementing a few crucial measures. Here are some ideas to consider:

Put into practice sensible monetary policies. The government ought to concentrate on upholding a framework for monetary policy that is steady and dependable. In order to prevent excessive speculation, which can cause currency volatility, interest rates should be set at levels that encourage investment.

“In order to sustain the value of the Naira, it is imperative to establish and uphold a sufficient level of foreign exchange reserves. To boost foreign exchange inflow, the government should give top priority to measures that encourage exports and draw in foreign investments.

Encourage export diversification because the Naira is more susceptible to changes in the price of oil globally if it depends too heavily on oil exports. The government ought to encourage non-oil industries like manufacturing, services, and agriculture in order to broaden the nation’s export base. This would lessen the pressure on the Naira and enhance the trade balance.

“Control Inflation: Over time, high inflation reduces the value of the currency. To control inflation, the government should enact sound fiscal policies, such as reasonable taxation and spending limits. This would draw in both foreign and domestic investors and increase trust in the Naira.

“Strengthen local industries: The need for foreign exchange can be decreased by promoting domestic production and lowering reliance on imports. Government programs aimed at building capacity, infrastructure, and incentives should all be used to support industry. This would ease pressure on the Naira and promote economic growth.

“Improve accountability and transparency: The government should work to ensure accountability and transparency in all financial transactions, including those involving foreign exchange. This would lessen the negative effects of speculative activity on the value of the Naira as well as corruption and illicit financial flows.

“Boost investor confidence: It’s critical to interact with domestic and international investors to allay their worries and establish a favorable business climate. The government ought to prioritize enhancing governance, upholding the rule of law, and tackling security issues in order to draw in more foreign capital and strengthen the Naira.

It’s crucial to remember that maintaining the Naira’s gains versus the USD is a difficult task that calls for an all-encompassing strategy. These recommendations offer a foundation, but they should also be followed by ongoing observation, assessment, and modifications in light of the changing economic environment, the speaker said.

In the meantime, Mr. Idakolo Gbolade, CEO of SD & D Capital Management, stated that the government ought to tighten its supply of foreign exchange in the market.

“The ability to enter the market with available foreign exchange is necessary for the Naira’s stability. The airlines’ claims that only 10% of their backlog has been cleared may be the cause of the recent decline. This demonstrates that more work needs to be done by the CBN to build systemic trust.

One of the main sources of income for the nation is crude oil revenue, so changes in this source will have an impact on our ability to grow revenue and accumulate it in foreign reserves.

“The government ought to step up its intervention by providing additional foreign exchange to clear the backlog and accommodate new requests.”

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