Nigeria’s Naira Falls Against Dollar: Causes and Possible Solutions

The Nigerian Naira has been on a steady decline against the US dollar, with a 3.8% decrease in value in the past month alone. This decline has been attributed to a cash crunch in the country and heightened uncertainty.

According to Bismarck Rewane, managing director and CEO of Financial Derivatives Company Limited, the official exchange rate remains overvalued, and sources of foreign exchange remain weak due to sub-optimal oil production, capital flow reversal, and exchange rate premiums at the parallel market.

The exchange rate at the Investors and Exporters (I&E) forex window steadied at N462/$ in January and February, while the official exchange rate remains overvalued compared to N750 recorded at the parallel market. This has made exchange rate management crucial for boosting growth in Nigeria.

However, there is no clear indication from the incoming administration on what exchange rate regime it prefers.

Commenting on the nation’s exchange rate, Chinwe Egwim, chief economist and head of economic research at Coronation Merchant Bank, said it is unclear if president-elect, Bola Ahmed Tinubu’s administration would prefer a floating exchange rate regime, but the manifesto states that “the exchange rate cannot be ignored nor left to the whims of the market”.

She said, “healthy accretion in external reserves should be recorded by the end of 2024 which would support foreign exchange liquidity and give the Central Bank of Nigeria more room to defend the naira.”

Most experts however believed the solution to the falling Naira is to unify the rates at the parallel and official markets as Egypt did in 2016. Although this led to a sharp rise in the inflation rate by 30%, it was complemented by tight monetary and fiscal policies to reduce liquidity build-up, and reserves accrued to $45 billion in 2019.

Others explained that another solution would for the country to up crude oil production in order to improve foreign revenue generation needed to prop up the value of the local currency by meeting demands of the dollar at the official rate.

Investors King reported that Nigeria’s crude oil output stood at 1.3 million barrels per day in February while OPEC’s quota for Africa’s largest producer remains at 1.8 million barrels per day. Indicating that Nigeria is producing 500,000 barrels per day below its quota.