Nigeria’s Finance Minister, Adebayo Olawale Edun, has attributed the naira’s abysmal decline to the approximately $6.8 billion in overdue forward payments in the foreign exchange market, emphasizing that addressing this issue is crucial for the stabilization of the local currency.
According to Bloomberg, Edun stated that resolving these outstanding contracts would not only strengthen the naira but also facilitate additional foreign exchange inflows.
The naira’s decline has been attributed to the illiquidity across Nigeria’s FX markets – especially in the Investor & Exporter window. The naira reportedly reached the N1,000/$1 threshold in the parallel market on Thursday, as supplies from the central bank to the FX market tanks amid rising demand.
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“The issue we have now is that the market is not liquid enough. We are committed to encouraging liquidity based on reforms that have been made at the moment, on the fiscal side and the monetary side. And together with the restoration of trust and confidence, we think the FX flows will return,” Edun, who accompanied President Bola Tinubu to New York for the United Nations General Assembly, was quoted as saying in an interview there.
The FX illiquidity backdrop, which has culminated in a huge economic crisis for Nigeria over the years, has defied attempts by President Bola Tinubu’s administration to address it. Reform policies such as the removal of fuel subsidy and the floating of the naira, have instead seen the embattled currency crumble further in the FX market.
The impact is loudly evident in Nigeria’s inability to fulfill its international financial obligations that require foreign exchange. Nigeria has about $7 billion backlog in FX obligations to clear with insufficient dollar inflow.
Last year, Emirates Airlines suspended its operation in Nigeria due to its inability to repatriate over $80 million in trapped revenue.
The situation stands in the way of FDIs (foreign direct investments) and PDIs (portfolio direct investments). Economists said that investors are being spooked by the lax macroeconomic framework spearheaded by the FX crisis.
So far, efforts by the federal government, such as the $3bn emergency loan the Nigerian National Petroleum Company Limited secured from Afreximbank, have failed to boost FX liquidity.
Recently, the situation has been compounded by the inactivity of the central bank, which, besides halting FX supplies to the market, has postponed its Monetary Policy Committee (MPC) meeting scheduled for September 25-26, where it’s expected to further raise interest rate to tame rising inflation.
The central bank’s inactivity is attributed to the wait for the confirmation of the newly-appointed CBN governor, Olayemi Cardoso, which has led to the resignation of the acting governor and four deputy governors.
The gap in decision-making created by this development has impacted the CBN’s supply to the FX market, opening an N230 exchange rate gap between the parallel market and the I&E window, which has been relatively stable at N770/$1.
Edun said the solution is to boost FX supply by sustaining and improving the reforms.
“The commitment is to maintain the existing reforms and improving them, improving the FX market further so the gap narrows. Looking at all options for boosting supply so the one-way bet of speculators that we are seeing at the moment is reversed,” the finance minister said.