It is no longer news that the plunging oil prices have increased pressure on the naira. since Nigeria produces less locally Africa’s largest economy exports mostly crude oil, but it spends its foreign earned currencies on supplies abroad for basic items such as food, wears, electronics, and refined petrol.
According to Nigeria’s foreign trade report, in 2019 alone Nigeria spent about Nl6.959 trillion ($47 billion) on imports compared to N 13.1 trillion ($36.5 billion) a year earlier. It spent about $28.7 billion on invincibles (spend on services such as professional fees, financial services, business travel, medical tourism, etc.)
This illustrates how Nigeria imports everything, and since it produces less locally, thereby increasing demand for the dollar needlessly; importers need American dollars to pay for goods bought abroad, causing depreciation of Nigeria’s local currency.
Though the disparity between the official rate and parallel market rates has narrowed to about 10%, the Naira is still experiencing pressure from the strong dollar.
As a result of this, the Naira has been tanking out as the greenback continue to draw many Nigerians who are moving their assets to dollar dominated assets, with it drawing strength from risk aversion. Since the start of the COVID-19 pandemic, the value of the American dollar has reached record highs, as many investors around the world are rushing to have a part ofit.
The sad part of the case for Nigeria is that the country is not seeing enough inflows of via the financial accounts that can help bridge the gap in the current account of the balance of payment. Right now, the country is looking to obtain over $6 billion in funding from World Bank, AFDB, and IMF as well as debt services relief on previous foreign debt. We believe the government is unlikely to obtain all the foreign borrowing it needs to plug the deficit.
If the needed amount of inflows is not obtained via external borrowings, FPI flows, or FD Is, the CBN could result to significant drawdown on reserves and may eventually bow to a devaluation when it runs out of armory to defend the Naira. Furthermore, a look at the Nigerian industrial sector shows that higher import costs, coupled with a fall in the foreign exchange reserves standing at about $33.9 billion as of 23rd April 2020, are increasing local production costs, spurring domestic inflation thereby depreciating the naira.
The case for further Naira re pricing is strong. Nigeria is facing a twin deficit crisis across its fiscal and current account books and these deficits are likely to get wider with the weak oil price and production. Given the trend in the oil market, the US (United States.) dollar rose against a basket of major currencies amid the sharp drop in oil prices, as investors move to haven assets. As lockdown continues and factories stay closed with travel restrictions, oil prices continue to dive lower due to low demand, it draws money from risk assets to the safety of the US dollar and its denominated assets. We, therefore, call on all to see protecting the Naira as a joint responsibility and cooperate with the government to bring down needless demand for dollar. This means we should curtail our consumption of foreign goods, increase productivity and export more.
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