Therapy for Nigeria’s Troubled Currency

Nigeria’s perennial exchange rate crisis can only be resolved when the country seriously adopts export promotion strategies and genuinely implement economic diversification policies, writes Obinna Chima

The depreciation of the naira against the US dollar in the past few days has sent shock waves across the financial market. While the development has been attributed to the scarcity of the greenback, it also presages further troubles for the growth of the Nigeria economy.

On the interbank market, the naira closed last Friday at N307.98/$1. Also, parallel market rate waned throughout the week, down by 3.6 per cent week-on-week from N365/$1 the preceding Friday to N378/$1 by the end of the week. The naira equally depreciated at the Bureaux De Change market to N365/$1 as unmet dollar demand continued to spill into the alternative market segments.

To most financial market experts, the lacklustre performance displayed by the naira reflects the symptom of broader economic problems such as the import-oriented structure of the economy, continued inflationary pressure, fiscal imbalance, among others.

Notwithstanding other external factors plaguing the naira, Nigeria’s heavy import dependence is majorly responsible for the high forex outflow and the perennial weakness suffered by the naira.

The country’s high import dependence explains why the exchange rate is often the bellwether for Nigeria’s economic health, and why there is a swift pass-through of exchange rate movements to inflation.

Indeed, accelerating general price level, bearish growth outlook, weak credit expansion to the private sector, rising level of banks’ non-performing loans and volatility in the FX market have continued to pressure domestic economy and financial market.

About a third of Nigeria’s forex outflows are due to invisibles, which refers to services. These include international payments for services as well as movement of money merely for transfer payments. Also, the country’s infrastructure deficit explains the huge level of importation of processed and final goods.