5 Reasons Why The Dollar Will Continue to Crush the Naira

The rapid rate at which the naira is depreciating against the exchange rate of the dollar has ignited a cause for alarm as Nigerians continue to worry about why it is so. More than ever, there has been a persistent deprecation of the naira since the Central Bank of Nigeria (CBN) announced new operational measures in the foreign exchange market. 

As of today, 30th of August, 2023, the dollar to naira in the parallel market exchange rate has an average of ₦920 per $1. In comparison to the past week, the dollar-to-naira rate saw a 9.2% increase. This is worrying because it could lead to higher prices for goods and services and increased inflation, given that many of the items Nigerians consume are imported or have significant import components, including petroleum products, wheat, and raw materials.

This article highlights reasons why the naira would continue to depreciate against the dollar. Let’s dive in.

Declining forex supply due to dependence on imported goods

The dependence on imported goods for many of the country’s economic activities has fuelled naira’s depreciation against the dollar. This is because the supply of dollars in the economy has been declining while the demand for dollars remains unchanged due to the nation’s huge demand. This is evident in the continuous decline of the country’s external reserves, which signify the quantity of dollars and foreign currency accessible for imports and international transactions.

For the external reserves, foreign exchange inflow which represents supply comes from foreign investment, external loans, export earnings, diaspora remittances, etc. While foreign exchange outflow, which represents demand comes from external debt service, funding of importation, travel, etc. The external reserve rises when the inflow is more than the outflow while the external reserve falls when the outflow is more than the inflow.

Persistent decline in net forex inflow

Net Forex Inflow (NFI) is a vital way to measure the money coming into and going out of a country. When more money comes in than goes out, NFI goes up, but if more money leaves than comes in, NFI goes down. CBN revealed that Nigeria’s NFI has been going down since 2019. In 2019, NFI was $76.38 billion, but it fell to $70.65 billion in 2020, then dropped even more to $52.72 billion in 2021, and fell the most to $37.94 billion in 2022. 

This means that in just four years, NFI went down by almost half, which is 49.5%. One big reason for this drop is less money coming from other countries to invest here. The National Bureau of Statistics says that foreign investment in Nigeria fell from $23.99 billion in 2019 to only $5.33 billion in 2022. That’s a huge 77.8% drop in money coming into the country.

The amount of dollars being traded in the official forex market also went down a lot. In the first half of 2023, only $13.11 billion was traded. This is 35% less than the $20.23 billion traded at the same time in 2022. When there’s not enough of something and people want it, its price goes up. That’s why the value of the Naira compared to the dollar keeps going up.

CBN’s new forex market measure

The naira’s drop and potential continuous drop in value also link to changes the CBN made in how the forex market works. Before, they had different exchange rates for different situations, but now they’re using a new approach. These measures involve getting rid of various exchange rates in the official market and implementing the willing buyer willing seller framework to establish exchange rates in the Importers and Exporters (I&E) window.

This means the naira’s worth is more flexible. The CBN couldn’t provide enough forex due to low reserves, a situation that pushed many groups to rely on the parallel market. 

Objectives of the forex measures

The goal of these measures is to make the forex market more open and reliable. This should attract more money to come into the country, especially foreign investment, which has dropped by 77% in four years. However, because there’s not enough forex available but lots of people need it, especially to cover past needs, the new measures made the exchange rate go up a lot. 

In the I&E window, the rate went from N471.67 per dollar on June 13 to N781.34 recently. This change also caused the rate in the parallel market to go up from N768 per dollar on June 13 to N930, marking just the beginning So, while the measures aim for better transparency and confidence, the shortage of forex led to higher exchange rates.

Nigeria’s lack of export diversification

A big issue affecting the naira’s value is the country’s limited variety of things it sells to other places, called exports, and the constant high prices of things in Nigeria, which is known as inflation. Recent data from the CBN shows that almost 90% of what Nigeria sold in the first part of 2022 was oil and gas. This makes the naira’s worth depend a lot on just a few things, making it vulnerable to changes in those industries. This lack of diversity in what Nigeria sells abroad contributes to the naira’s challenges.