Any Hope for the Naira?

Nume Ekeghe writes on the foreign exchange regime, which has led to a continuous weakening of the naira

 As Nigeria approaches a critical juncture in its economic journey under the leadership of President Bola Tinubu, the fate of the national currency, the Naira, comes under scrutiny. The exchange rate at the inception of the Tinubu administration, as at May 29, 2023, stood at a notable N464.51 while the parallel averaged N750. However, as at Monday 29, January, eight months after becoming president the official market rate stood at N1,348.62 to the US Dollar, signifying a substantial departure from the initial figures or 190.18 decline.

 A retrospective examination of past administrations revealed a recurring trend of depreciation. President Buhari’s tenure witnessed the Naira’s value decline significantly, concluding at N464.51 to the US Dollar by May 28, 2023, a stark contrast from the N197/$1 rate at the commencement of his first term in 2015.

Similarly, during President Goodluck Jonathan’s term, the Naira experienced a substantial dip from N150.00 to N198.50 against the US Dollar from May 6, 2010, to May 29, 2015, reflecting a depreciation of approximately 32.33 per cent.

Market Uncertainties

Meanwhile, experts warn of ongoing pressure on the Naira across various segments. Analysts at Afrinvest attribute the steady decline of the naira to the Central Bank of Nigeria (CBN) limited capacity to increase supply, creating an environment of uncertainty and volatility. Also, a PricewaterhouseCoopers (PwC) report throws a curveball, claiming a staggering 98 per cent depreciation between May and December 2023. This drastic change is linked to the government’s decision to consolidate multiple foreign exchange windows into a single Investors and Exporters (I&E) window, raising concerns about its impact on attracting Foreign Direct Investment (FDI) due to potential repatriation challenges. There is no hope in sight as analysts at Afrinvest said they anticipate the Naira to confront ongoing pressure across FX segments. This outlook is attributed to the CBN’s limited capacity to substantially enhance supply, introducing an element of uncertainty and volatility to the foreign exchange landscape.

“Market participants should brace themselves for potential challenges and shifts in the coming week as the intricate dynamics of the FX market continue to unfold. We expect the naira to remain pressured across FX segments due to CBN’s constrained capacity to significantly boost supply, ”the analysts said.

On their part, PricewaterhouseCoopers observed that the value of the naira has fallen by as much as 98 per cent due to the decision of the federal government to collapse the  foreign exchange market into a single Investors and Exporters (I&E) window in 2023.

In a document, “Nigeria Economic Outlook: Seven Trends that will Shape Nigerian Economy in 2024,” PwC stated that the slump by almost 100 per cent took place within a period of seven months, spanning May to December 2023.

The report also indicated the much-needed Foreign Direct Investment (FDI), which had taken President Bola Tinubu outside the shores of Nigeria several times since he took over power, might continue to be elusive this year, if investors were not able to easily repatriate their capital.

The report stated, “Foreign investment may remain subdued in 2024 due to capital repatriation challenges. Removal of fuel subsidy (which cost $10 billion in 2022), and the collapse of multiple FX windows into a single I&E window , which caused naira to depreciate by 98 per cent between May and December 2023, among other monetary policy efforts, were key programmes executed to spur growth and regain investors’ confidence.” 

 Hope on the Horizon?

However, the CBN Governor, Olayemi Cardoso remains optimistic about 2024, expecting stability due to reduced oil imports and the newly implemented market-driven exchange rate policy. He emphasises transparency and addressing past market inefficiencies as key measures. His focus on fair exchange rate determination and ensuring stability for businesses and individuals offers a glimmer of hope.

Cardoso acknowledges the challenges but remains optimistic about the expected stability in the foreign exchange market for 2024. He attributes this outlook to the reduction in petroleum product imports and the recent implementation of a market-determined exchange rate policy. Cardoso underscores the importance of transparency, creating a market environment conducive to fair exchange rate determination, and ensuring stability for businesses and individuals alike.

As the Naira navigates these complexities, stakeholders, investors, and the public at large are keenly observing policy responses, market dynamics, and external factors that will shape its future trajectory in the evolving economic landscape. The resilience and adaptability of the Naira will undoubtedly play a pivotal role in determining Nigeria’s economic standing in the global arena.

Speaking at the Nigeria Economic Summit Group, 2023 outlook,  Cardoso added that the expected stability in the foreign exchange market for 2024 could be attributed to the reduction in petroleum product imports and the recent implementation of a market-determined exchange rate policy by the CBN.

According to him, “This reform is designed to streamline and unify multiple exchange rates, fostering transparency and reducing opportunities for arbitrage. The resulting consistent and stable exchange rate will not only boost investor confidence but also attract foreign investment, elevating Nigeria’s appeal to global investors.

“We are implementing a comprehensive strategy to improve liquidity in our FX markets in the short, medium, and long term. Our focus is on addressing fundamental issues that have hindered the effective operation of our markets over the years.

“Upholding the integrity of financial markets is crucial for building confidence. With the completion of an independent forensic review and the subsequent clearance of the backlog of valid FX transactions, we remain steadfast in our commitment to decisively address any infractions and abuses.”

Cardoso stressed that in the effort to stabilise the exchange rate, it was critical to prioritise transparency and create a market environment that enabled the fair determination of exchange rates, and ensured stability for businesses and individuals alike.

 Crucial Questions Remain

Despite the optimism, crucial questions linger. Can the CBN effectively manage supply constraints and stabilize the Naira? Will the single I&E window truly attract FDI, or will it create unintended hurdles? How will volatile oil prices and global economic factors influence the Naira’s future? As stakeholders, investors, and the public anxiously await answers, they closely observe policy responses, market dynamics, and external forces shaping the Naira’s trajectory. The resilience and adaptability of the currency will undoubtedly play a pivotal role in determining Nigeria’s economic standing in the global arena.