Nigeria is facing a serious challenge in its foreign currency (FCY) management, which could have negative implications for its international obligations and investment treaties.
The country has been struggling to meet the demand for FCY from various sectors of the economy, especially the importers and foreign investors. This has led to a shortage of FCY in the official market and a wide gap between the official and parallel exchange rates.
The Central Bank of Nigeria (CBN) has introduced several measures to address the situation, such as restricting access to FCY for certain imports, imposing capital controls, and devaluing the naira. However, these measures have not been effective in stabilizing the exchange rate or boosting the supply of FCY. Instead, they have created distortions and uncertainties in the market, and increased the risk of litigation and arbitration from foreign investors and creditors.
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One of the main risks that Nigeria faces is the potential breach of its international agreements and investment treaties as a result of its FCY policies. Nigeria is a party to several bilateral and multilateral treaties that protect the rights and interests of foreign investors and creditors in the country. These treaties typically include provisions that guarantee fair and equitable treatment, non-discrimination, free transfer of funds, protection from expropriation, and dispute resolution mechanisms.
Some of these treaties also contain stabilization clauses that prevent Nigeria from changing its laws or policies in a way that adversely affects the contractual obligations or expectations of foreign investors and creditors. For example, Nigeria has signed several power purchase agreements (PPAs) with independent power producers (IPPs) that are denominated in US dollars.
These PPAs require Nigeria to pay the IPPs in US dollars at a specified exchange rate, regardless of the fluctuations in the market. However, due to the shortage of FCY, Nigeria has been unable to fulfill its payment obligations under these PPAs, which could trigger claims for breach of contract and treaty violations.
Another risk that Nigeria faces is the potential loss of its sovereign immunity and assets in case of an adverse award or judgment from a foreign court or tribunal. Nigeria has waived its sovereign immunity in many of its international agreements and investment treaties, which means that it can be sued by foreign investors and creditors in their home countries or in a neutral forum.
If Nigeria loses such a case, it could face enforcement actions against its assets abroad, such as bank accounts, properties, or oil cargoes. This could have serious consequences for Nigeria’s reputation, credit rating, and economic stability.
Therefore, it is imperative that Nigeria reviews its FCY policies and adopts a more flexible and market-driven approach that balances its domestic needs with its international obligations. Nigeria should also engage in constructive dialogue and negotiation with its foreign investors and creditors to resolve any disputes amicably and avoid costly litigation and arbitration.
Nigeria should also seek technical assistance and support from its development partners and multilateral institutions to address its structural challenges and improve its FCY management.
The Naira is Undervalued: CBN Unveils Plan to Tackle Forex Crisis in 2024
The governor of the Central Bank of Nigeria (CBN), Yemi Cardoso, has unveiled a fresh plan to address the country’s lingering forex crisis in 2024.
In his keynote address at the Nigeria Economic Group outlook for 2024, which was held via video conference, acknowledged the impact of the forex crisis, which has resulted in the massive decline of the country’s currency, the naira, on the economy.
Admitting that the situation requires urgent measures, Cardoso said that the naira is undervalued and requires collaborative efforts between the monetary and fiscal sides of the economy to achieve genuine price discovery.
“We believe that the naira is currently undervalued. And coupled with coordinated measures on the fiscal side, we will expedite genuine price discovery in the near term. This coordinated approach will contribute to a more balanced and stable exchange rate,” he said.
According to him, the commitment to collaborating with the Ministry of Finance underscores the acknowledgment that addressing the forex crisis requires a comprehensive approach. He said that the ultimate objective is to establish a stable and balanced exchange rate that genuinely mirrors the true value of the naira.
Cardoso also addressed the issue of dwindling forex reserves, outlining the Central Bank’s partnership with the Ministry of Finance and the Nigerian National Petroleum Corporation Limited (NNPCL). He assured that all foreign exchange inflows would be returned to the bank, contributing to the accretion of the country’s foreign reserves.
The governor noted that boosting forex reserves is crucial for Nigeria’s economic stability. Adequate reserves act as a safeguard against external shocks, ensuring the nation’s ability to meet international financial obligations and maintain exchange rate stability.
Furthermore, Cardoso highlighted the Central Bank’s commitment to implementing inflation-taming policies. He pointed to the expected resumption of operations in the country’s three refineries, saying that it would contribute to a reduction in the pump prices of Premium Motor Spirit (PMS), a significant component of the Consumer Price Index (CPI) basket.
“Inflationary pressures are expected to decline in 2024 due to the CBN’s inflation-targeting policy, which aims to rein in inflation to 21.4%,” he stated. This ambitious target aligns with the Central Bank’s broader objective of fostering economic growth and providing a more predictable cost environment for businesses.
Cardoso also highlighted the potential positive impacts of decreasing inflation in 2024. A more predictable cost environment could lead to lower policy rates, stimulating investment, fueling growth, and creating job opportunities. This optimistic outlook underlines the Central Bank’s belief that addressing the forex crisis and implementing effective inflation-targeting policies can pave the way for a more resilient and prosperous Nigerian economy.
The multifaceted approach, encompassing collaboration with the fiscal side, efforts to increase forex reserves, and inflation-taming policies, aims to achieve genuine price discovery and stability in the foreign exchange market.
However, while Cardoso’s address reflects the Central Bank’s commitment to tackling Nigeria’s forex crisis in 2024, concerns remain over the ineffectual approach deployed by the central bank earlier.
Since last year, the central bank has implemented a series of strategies to address the volatile forex situation. Despite these measures, the naira has continued to decline, reaching its lowest month-on-month point. As of Wednesday, the naira was exchanged at N1,398.083 against the dollar in the parallel market. Although it shows relatively better performance at the official market (NAFEM) at N878.61 per dollar, the prevailing illiquidity in that window has led the parallel market rate to serve as the determining benchmark.
Against this backdrop, the nation watches closely as the central bank implements its freshly announced strategies to tackle the forex headwinds. The success of the CBN plans is expected to play a pivotal role in shaping the country’s economic fortune and fostering sustainable growth.