Things are currently not looking good for the naira in the FX market, as its depreciation accelerates farther from when the Central Bank of Nigeria (CBN) removed control pegs on the currency in June.
Naira’s performance against the dollar at the parallel market dropped to as low as N930/$1 on Thursday afternoon, triggering fresh anxiety among Nigerians. The new exchange rate indicates about a 5% increase from the N910/$1 recorded on Wednesday.
The pace, which creates anticipation for a fast-approaching N1,000 per dollar exchange rate, is expected to compound the squeeze that businesses and consumers are currently feeling.
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“Businesses and consumers are squeezed because of this. This will lead to a reduction in the quantity of imported commodities doubling the price. There’ll be capital flight. You’ll see people looking for a safe heaven,” Clement Izu, Head of Research, Financial Derivative Company Ltd., told AriseTV in an interview.
The Africa Development Bank said the ongoing trend of currency depreciation in economies with higher global integration, such as Nigeria is likely going to continue. The development bank attributed the projection to capital outflows from investors seeking refuge in safe advanced economies.
With the impact of the forex crisis accelerating quickly across goods and services, Nigerian consumers are bracing up for unaffordable spikes in the cost of things.
The prices of petroleum products are expected to rise further. The Independent Petroleum Marketers Association of Nigeria (IPMAN) has reportedly issued a notice of an increase in pump price.
“Nigerians should understand that with fuel subsidy removal, the government is no longer determining pump prices but the market forces. The product is bought in dollars. The dollar is around 890/$1 now. As the dollar climbs, fuel pump prices will continue to go up,” Daily Post quoted Chinedu Okoronkwo, the National President of IPMAN, as saying.
The Nigerian Association of Liquefied Petroleum Gas Marketers announced Thursday a plan to review the prices of cooking gas upward, citing the rise in exchange rates.
Also, electricity consumers have decried over 100% hike in electricity bills, which many say is unaffordable.
Against this backdrop, the clamor for a solution has not been higher. But the solution is farfetched as the naira’s strength is largely tied to Nigeria’s export earnings.
Though the CBN said FX inflows into Nigeria through the Investor and Exporter window rose to $2.55 billion in two months following the deregulation of the forex market, the volume remains insignificant to the liquidity requirement that will boost the naira.
The insufficient FX inflow is attributed to poor oil output, which provides for more than 90% of Nigeria’s exports.
The nation’s daily oil production in July 2023 fell by 13.6% to average 1.08 million barrels per day compared to 1.25mbpd recorded in June, according to the latest production data from the Nigerian Upstream Petroleum Regulatory Commission, (NUPRC.)
The volume of production falls notably below the 1.7 million barrels per day production quota assigned to Nigeria by the Organization of the Petroleum Exporting Countries (OPEC). The most recent production figure represents a major setback for the government, which set a production target of 1.69 million barrels per day in the 2023 budget.
Diaspora remittance, which has served as another avenue of boosting forex liquidity, has significantly dropped in the past months. Following the floating of the forex market, the CBN abolished the naira 4 dollar scheme designed to encourage diaspora remittance and the RT200 FX Programme launched in early 2022, with a set of policies and plans to boost non-oil exports.
The significant drop in forex liquidity resulting from all these has piled more pressure on the naira, making it more vulnerable among its peers in the foreign exchange market.
While the CBN’s decision to float Nigeria’s forex market has been widely praised by investors, concern remains that it will bring unbearable economic hardship on Nigerians if measures are not taken to mitigate its immediate inflationary pressure.