Naira Devaluation Deepens Economic Crisis in Nigeria
Nigerian Naira

Naira Devaluation Deepens Economic Crisis in Nigeria

The Central Bank of Nigeria’s (CBN) recent naira devaluation has deepened the economic crisis in Africa’s largest economy by the size of its gross domestic product (GDP). Noting a budding crisis, analysts are projecting that real growth will shrink in 2023, sustaining its downward trend seen last year.

Nigerian middle class economy is fast collapsing as the monetary authority loses tough with single digit inflation targeting despite fast and furious benchmark interest rate hikes since May, 2022.

Among other headwinds, the sudden liberalisation of the local currency has plunged companies into large losses, a glimpse from financial statements submitted to the Nigerian Exchange shows, and the gory, unsavoury experience could extend further into the fourth quarter of 2023

The Nigerian naira has lost its allure as citizens can only acquire less of anything with a large amount of the local currency in their wallets. After devaluation of the naira, the local currency has become the worst performance in African markets, according to data from CardinalStone Research.

With the recent official devaluation, the exchange rate has worsened, in contrast to the expectation that a devalued local currency would reduce imports and force locals to look inward. But Nigeria’s import appears to be inelastic as demand for FX rather spiked, thus failing to curb import taste.

On Friday, market participants at the Central Bank of Nigeria’s (CBN) Investors, and Exporters’ foreign exchange window sold the United States dollar at N775.76, while the parallel market rate closed at N865.

Economists said devaluation has no advantage if the country cannot produce goods and services that can compete for additional foreign currency spending in foreign countries. It rather worsens Nigerians’ misery index due to immediate impacts on prices of goods and services.

With the weak market condition and dearth of infrastructure, Nigeria has a comparative cost disadvantage to produce goods that the global market is willing to accept – apart from hydrocarbon. Economists said though border closure would have been soft protection for local industries, immediate removal of such external competition with cheap goods triggered home inefficiency that allowed local producers to push prices upward at will.

Many companies in Nigeria depend more on imported goods and services to further production processes, making the dominant United States dollar demand steady, MarketForces Africa industries review showed.

In their separate unaudited financial statement for the first half of the year, many companies in fast fast-moving consumer goods segment, (FMCG) financial services, and telecommunication saw their earnings decline significantly due to large devaluation.

As a survival strategy, many Nigerian-based companies are reducing headcounts, and production volume to salvage the tough economic conditions. The double whamming effects of subsidy and naira reform on companies would push unemployment, and inflation rates higher, LSintelligence Associates told MarketForces Africa.

Analysts told MarketForces Africa the timing for naira devaluation was wrong, not well thought through and not CBN-initiative – Naira reform tilt toward political influence stoked pressures on the apex bank due to an inability to flood the official window with US dollar supply.

In an update, Bank of America’s global research hints that the local currency is currently undervalued with the expectation that the Naira will claw back losses associated with large devaluation booked by the Central Bank of Nigeria (CBN).

In its note, BofA told investors that it expects naira to be exchanged at N680. However, the local currency has been swinging left and right since June, then crossed the red line when it hit N803 per US dollar at the official market.

Broadstreet analysts maintain consensus that the Nigerian naira will gain strength on condition that the CBN settles forex backlog owed to foreign investors. Analysts added that this must happen to boost foreign investors’ confidence and attract sizeable inflows needed to wet the local economy space after a sustained shortage of foreign currency.

Standing in support, Fitch also said in its premium report that the exchange rate will depend on the extent to which Nigeria succeeds in attracting foreign investment following the devaluation.

It noted that foreign portfolio investors’ (FPI) participation in the domestic equity market has increased since the devaluation, but analysts believe sustained inflows will require a commitment to structural and market-friendly reforms, including a more orthodox approach to monetary policy.

Real yields on naira-denominated sovereign fixed-income securities have been deeply negative since 2019, which, in combination with FX controls, has constrained FPI inflows. In 2019, the CBN banned some individuals from participating in open market operations, creating excess liquidity that drove yield downward.

MarketForces Africa gathered that hot monies often flow through the fixed income market but persistent negative interest yield driven by inflation surge has forced foreign portfolio investors to maintain distance.

In the official window, the exchange rate has always faced pressures emanating from FX imbalance. Demand for imports continues to outpace the supply side, creating a disequilibrium position for the local currency to trade.

Fitch Ratings however said the foreign currency supply should benefit from improved oil production, which has been constrained by a combination of oil theft, pipeline vandalism, and low investment, limiting the benefits of high oil prices in 2022.

Furthermore, the rating agency expects a marked increase in refining capacity in the financial year 2023 as the Dangote Refinery plant commences operations, reducing import and transportation costs.

According to the rating report, the fuel subsidy has been a key driver of Nigeria’s deteriorating public finances, costing 2.2% of GDP in 2022 or equivalent to over US$10 billion. Analysts noted that there had been significant uncertainty as to whether President Tinubu would commit to this schedule or opt for a phased removal.

The president’s confirmation in his inauguration speech that the fuel subsidy had ended caused fuel prices to jump to over N600/litre from under N180/litre.  Reacting to the removal, fuel consumption decreased notably in June.

Fitch expects the subsidy removal to support fiscal consolidation. It observed that protests against removing the fuel subsidy have been limited, but there is still a risk of social unrest. Recall that previous attempt to remove the fuel subsidy was abandoned in 2012 amid nationwide protests. #Naira Devaluation Deepens Economic Crisis in Nigeria Russia Writes off $23bn Debt for Africa – Putin

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ogochi Ndubuisi is creative content manager with interest in marketing and advertisement. Ogochi supports MarketForces Africa's clients corporate communication units with content development and liaise with media unit for disseminable product information.