Business
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The value of the Naira, Nigeria’s currency, is depreciating drastically because of the dwindling oil revenue and the drop in the foreign reserve
| By Anayo Ezugwu | Dec. 8, 2014 @ 01:00 GMT |
NIGERIA’s economy is not having it easy at the moment despite the storied growth of the gross domestic product at 6 percent recently. Apart from the dwindling oil revenue because of the fall in the international price of the product, the value of the Naira to other major currency has gone down considerably. As at November 4, Naira was exchanged at N160 to the dollar at the bureau de change. But now the value has depreciated to about N180 to a dollar.
As at Tuesday, November 25, some banks sold a dollar at between N175.28, and N176.28 while the Central Bank of Nigeria, CBN, exchanged at N158.5 to a dollar. Since October, the Naira has fallen against the US dollar by N7.9 at the interbank market, and N10 at the parallel market. According to interbank and parallel market operators the depreciation in the value of Naira was because of the restrictions introduced by the CBN to curb foreign exchange demand at the official market. Also, the fall in crude oil prices, coupled with depleting foreign reserve and excess crude account triggered palpable anxiety about the value of the naira. This has also affected the price of stocks at the Nigerian Stock Exchange, NSE.
Consequently, the CBN on October 28, banned banks from selling dollars to Bureaux de Change and on November 6, it said it will no long sell forex for the importation of six items including finished products, information technology, generators, telecommunication equipment and invisible transactions. According to the apex bank, the items would henceforth be funded from the interbank foreign exchange market only.
There are other corollary factors leading to the depreciation of Naira which has spiked the prices of goods and services and further impoverished the masses in the country. Some of them include the inordinate demand for dollar by investors and the domestic importers who want to keep the value of their investments and the value of their cash intact by putting their monies in the dollar. Prior to the present state of affairs, the Naira had gained a 2.5 percent amid high demands for dollar by those who did not want to continue to risk leaving their cash in the local currency for fear of devaluation.
But the CBN’s policy on curtailing the sale of dollar for certain importation of goods may have moved forex demand for importation of the six items from the official market to the interbank market. The two restrictions combined triggered sharp increase in demand for forex in the interbank market, and scarcity of dollars in the parallel market. Although the CBN was selling intervention dollars to commercial banks, which could trade with the dollars because of the 10 kobo limit. This created a scarcity situation in interbank and the subsequent steady depreciation of the naira.
The CBN imposed the restrictions to stem the persistent decline in the nation’s external reserves following continued decline in price of crude oil. Within three months, the price of crude oil fell from $100 per barrel to $78 per barrel. The decline in crude oil prices made foreign investors apprehensive that it the value of Naira will also drop. This explains why they moved their money out of the country by divesting from the nation’s stock market and federal government bonds. The outflows of funds from the country have been going on since August as the investors sold their equity and debt markets moved it to better economies where yields in investment are greater. Realnews gathered that investors pulled out N101.2bn ($583.6m) from the stock market in October.
Currency dealers said the demand for dollars was mainly from importers buying foreign-made consumer goods and electronics ahead of the Christmas holiday. Apart from importers’ case, there has been panic buying of the dollar due to the uncertain outlook for the naira and uncertainty in the political horizon with the insecurity in the land and elections which are billed to hold early next year. These made investors and importers to bring forward their dollar obligations to mitigate any unforeseen risk.
The depreciation of the Naira is not limited to the dollar. It has also been depreciating against the Euro and Pound Sterling in recent times. The exchange rate of the Euro has risen to N220 from N117 as at Tuesday November 25. Although economic observers are optimistic that the naira will close the year moderately at about N170 at the interbank market there are some Nigerians who think otherwise.
Aminu Gwadabe, acting president, Association of Bureaux De Change Operators of Nigeria, ABCON, attributed the depreciation to scarcity of dollars in the market. He added that most of the banks are not selling dollars to Bureaux de Changes, BDC, thus worsening the problem.
Supporting this view Harrison Owoh, managing director, HJ Trust BDC, said that parallel market rate rose from N177.3 to N180 per dollar because there is no dollar in the market. To him, the banks are not selling to BDCs, and only two banks sold, at N179 per dollar and N178.4 per dollar, respectively.
Owoh said that the market was overwhelmed with uncertainty about the exchange rate, adding: “In fact, we don’t know what the rate of the dollar is now”.
The free fall of the Naira has made Muda Yusuf, director-general, Lagos Chamber of Commerce and Industry LCCI, warn that if the naira continues to fall, it will have profound implications on the operating cost, production cost and impact on the inflation in the country. According to him, companies would be affected as the profit margins of many companies will be eroded because the country is import dependent.
The silver lining is that monetary and fiscal authorities represented by the CBN and the ministry of finance have come up with stiffer policies that would tighten the economy and lead to higher interest rate; make interbank markets more expensive.
But the downside is that “Import duties and taxes would also increase which will consequently affect the welfare of the citizens,” Yusuf said.
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