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.

“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.

The Central Bank of Nigeria (CBN) has attributed the woeful performance of the naira in the foreign exchange market to the diversion of diaspora remittances to the black market.

This was stated by the acting governor of the apex bank, Folashodun Shonubi, at the National Institute for Security Studies, Abuja. Delivering the Distinguished Personality lecture titled “Diaspora Remittances and Nigeria’s Economic Development” to participants of the Executive Intelligence Management Course (EIMC) 16, Shonubi said most of the diaspora remittances that came into Nigeria in dollars find their way to the parallel market without being recorded officially.

The acting central bank governor stated this amid the naira’s fall to N930 per dollar at the parallel market on Thursday, which marks its worst performance since the CBN floated the FX market in June.

“With those remittances, the dollars have come in, we know the dollars have come in but we don’t see them in the official system. So, they must be going somewhere and somewhere,” he said.

“And the challenge with the black market, unofficial market or parallel market or whatever name you want to call it, it is as a result that it is not regulated, and it becomes an easy place to have criminal activities.

“We investigate bankers, not just bankers, anybody who has committed an offense, the first thing they want to do is to run to the black markets, change it to the dollars because it is less money to carry around.

“Some of the funding in the black markets are actually from diaspora remittances. That’s why it is important we need to know a lot of what’s going on there. We can’t play the sentiment game. If we don’t understand the dynamics, we usually go with the literature which does not necessarily work for us,” Shonubi said.

He indicated that the amount of inflow coming through many unapproved channels and eventually ending up in the black market contributes significantly to Nigeria’s current FX market situation.

The apex bank chief said that implementing measures within the country to manage illicit remittances and detect these pathways would be beneficial, because it would help direct remittance flows through proper channels, maximizing economic benefits for growth.
He added that Nigeria witnessed a surge in diaspora remittances in 2021, surpassing the inflows from the construction industry.

“We intend to use more of the banking system to send money to Sub-Saharan Africa cost highest because we don’t have masses. It would be helpful if we can work together to identify these channels because we just want the flows into the proper channels, there we can get maximum benefits to grow the economy.

“We talk about black markets, which also create their own problems. Management of the foreign exchange market and the efficacy of our policies to manage the exchange rate becomes difficult due to the insignificance of our diaspora remittances which are going to other markets.

“Today, someone called me privately and said that this thing (naira) has gone up to some levels in the black markets, my question was, what do you want me to do? Do I operate in the black markets? I don’t know the basis of pricing in the black markets.

“The other thing people don’t realize is that, because you don’t have full information, and I will give you an example since we started the I&E window. We found out that some people would deliberately wait until the last minute and do one transaction of $5,000 and that becomes the closing rate.

“We can’t do without diaspora remittances. For many countries, that’s their main source of income,” he said.

However, financial experts appear to disagree with the notion that unofficial remittances to the parallel market are responsible for the free fall of the naira. Nigeria’s forex crisis has been attributed to insufficient dollar liquidity, orchestrated by poor oil and non-oil exports.

Experts say that the existing liquidity gap is too wide to be filled by diaspora remittances alone.

Naira is crashing and the Association of Bureau De Change Operators of Nigeria (ABCON) is blaming Binance. Its president, Alhaji Aminu Gwadebe, wants Binance banned in Nigeria. Right now, the disparity between the official and parallel market rates has widened; the I&E window hovers around N782/$1 while the black market has hit N930/$.

“If you know about Binance, you will know that Binance trading is becoming the anchorage of both the investors and exporters window and the parallel market, which is unfortunate.

So, we have to do something that can stop? Binance. It’s a competition; we need to ban Binance and the only way to do so is if you have liquidity.

As I speak, Binance is the most liquid market; they do 1.2 million transactions per second. So it’s a very liquid market but that is not a scary status, we can break it through our local content and peculiarities.” Alhaji Aminu Gwadebe

This remains my position: “Nigeria will either pause the full floating of its currency or return back to fuel subsidy within 6 months. Nigeria’s weakest currency stability point remains that it has to continue importing petrol since it does not have any working refinery. That creates a vicious circle since those importing fuel will mark up prices, to cushion for the next round of import, working to stay ahead of currency deterioration, in a system with no official benchmark.”

Binance is not Nigeria’s problem. Our challenge is that we do not have parity on the demand and supply of Naira, and using basic economics, Naira will keep losing value since more people are looking for USD than supplying it in Nigeria. 

Floating or swimming Naira does not remove the play of fundamental economics in markets, and until Nigeria can have more USD, Naira will continue to lose value. But I expect the government to put a pedal very soon!

More so, according to the African Development Bank, in its  “Africa Economic Outlook 2023”, “Currency weaknesses in some of Africa’s more globally integrated economies (Kenya, Nigeria, and South Africa) are expected to persist in 2023, largely due to potential capital outflows as investors search for safe assets in advanced economies”.

Yet, with great policies, Nigeria can rise. The young people are very creative and can deliver great results if they are supported. For example, they continue to rake in revenue on Spotify and other ecosystems, demonstrating new potential sources of earning US dollars besides hydrocarbons.

“The number of Nigerian artists who generated more than 5 million NGN and 10 million NGN in royalties from Spotify alone has increased by nearly 25% over the last year. This figure represents revenue generated from Spotify alone and does not consider earnings from other services and recorded revenue streams, concert tickets, or merch.

“In 2022, revenues generated by Nigerian artists from Spotify alone reached over 11,000,000,000 NGN. While Nigerian music industry revenues overall have grown 63% from 2021 to 2022 (according to IFPI), revenues generated by Nigerian artists – from Spotify alone – grew 74% over this same period,” Spotify stated in the report. 

Meanwhile, the apex bank thinks the reason Naira is crashing is due to “the diversion of diaspora remittances to the black market.”

The acting central bank governor stated this amid the naira’s fall to N930 per dollar at the parallel market on Thursday, which marks its worst performance since the CBN floated the FX market in June.

“With those remittances, the dollars have come in, we know the dollars have come in but we don’t see them in the official system. So, they must be going somewhere and somewhere,” he said.

“And the challenge with the black market, unofficial market or parallel market or whatever name you want to call it, it is as a result that it is not regulated, and it becomes an easy place to have criminal activities.

“We investigate bankers, not just bankers, anybody who has committed an offense, the first thing they want to do is to run to the black markets, change it to the dollars because it is less money to carry around.

“Some of the funding in the black markets are actually from diaspora remittances. That’s why it is important we need to know a lot of what’s going on there. We can’t play the sentiment game. If we don’t understand the dynamics, we usually go with the literature which does not necessarily work for us,” Shonubi said.

The Japa syndrome and the high demand for foreign items makes the demand for the dollar more than the naira . Student paying school fees, Importation of raw materials and finished products are also keys factors driven this narrative.

— Keny David (@KennyNuga) August 11, 2023