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Nigeria’s currency weakness: Tracing the reasons behind a weak Naira

IFM_Nigeria Naira
The Nigerian currency called the Naira has been under intense pressure since the floatation of the exchange rate

A report issued by the Lagos-based Financial Derivatives Company Limited (FDC) has initiated talks again on the factors that led to Nigeria’s exchange rate weakness in recent times.

The study pointed out factors like macroeconomic imbalances in the form of high inflation and fiscal deficits, along with the recent currency policies especially the floating of exchange rate, behind the African nation’s economic mess.

The report made its way into one of the Nigerian Tribune’s March 2024 editions. It also identified elements like speculative activities, market sentiment and expectations, interest rate differentials and structural factors such as lack of productive capacity, that can hurt the country further.

The Nigerian currency called Naira has been under intense pressure since the floatation of the exchange rate. In January 2024, the local currency was believed to be on a one-way plunge towards N3000 per Dollar.

The International Monetary Fund (IMF) has already projected that the Naira’s value would end in 2024 at N2,081 per Dollar, a 35% depreciation.

The Economists Intelligence Unit (EIU), on the other hand, projected the ratio to be around N2,000 per Dollar, whereas the Federal Government of Nigeria’s Budget 2024 assumption set the exchange rate at N800 per Dollar while FDC believes that the exchange rate will stabilise at N1,580 per Dollar in 2024.

“Our view is that the Naira is bottoming out. It has less downside risk than upside potential. Just like the economy, a U-curve recovery is more likely than a V-curve (quick fix). Our model suggests the Naira will trade in the parallel market at the N1500 per Dollar–N1650 per Dollar range through March and April before a gradual and slow recovery. This means extended pain for Nigerian importers, manufacturers, and, more specifically, consumers,“ the FDC stated.

FDC in another analysis has said the Naira recovery may be sustained, citing recent decisions by the apex bank.

According to the firm, with the recent adjustment of the benchmark interest rate, the Monetary Policy Rate (MPR), by 400 basis points to 22.75%, the country’s inflationary pressures are likely to be tamed in the near term.

“A lower inflation rate will strengthen the Naira further and support its appreciation trend,” FDC stated.

Cordros Capital Group stated that the pace of the reforms by the apex bank is encouraging, raising the possibility of a stronger Naira over time.

“We are encouraged by the pace of reforms within the market as well as the renewed interventions by the apex bank,” the financial services group remarked.

“In our view, following through with recently implemented reforms alongside continued efforts to clear the forex backlog may lead to improved liquidity over the medium term,” Cordros Capital added further.

Expert Take On The Matter

A former Deputy Governor of the Central Bank of Nigeria, Professor Kingsley Moghalu, has stated that the Naira’s strength can be restored only through Nigeria’s transition into an economy driven by exports.

During the 29th annual Nigerian Economic Summit, Moghalu emphasised that the Naira’s recovery hinges on the African nation shifting to an export-driven economy.

When asked about addressing the decline of the Nigerian currency, Moghalu said, “The way to fix the Naira’s problems is a combination of things. Some of them are short-term, but let me start with the long-term because we’ve been trying to fix the problem of the Naira for a long, long time. It’s just been getting worse.”

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