In 2015, Muhammadu Buhari was quoted as promising to equate one naira to one dollar.
He was further quoted as saying, “It is sad that the value of the naira has dropped to more than N230 to one dollar. This does not speak well for the nation’s economy,”
Eight years after his comments and as of the day of writing this report, the naira exchanged for N460/$ – twice the N230 he had criticised before coming to power.
Interestingly, in May 2015 when President Buhari was sworn in, the dollar stood at N196 at the official market. The rate remained around N195 to N196 between May 2015 and June 17, 2016.
The rate then jumped to N279 on June 20, 2016.
The naira has weakened by 65 percent against the dollar since then, resulting in high prices of imports and lower export costs .
The official dollar rate to naira is far from the actual market reality, as the parallel market rate stood as high as N730-N740 on Wednesday, April 19.
Several concerns have been raised about the rate of Nigeria’s naira to the dollar and the general instability of the country’s foreign exchange market.
Why is naira getting weaker?
Nigeria’s heavy imports have been touted as a significant economic problem.
Nigeria is largely an oil-dependent country and has struggled to diversify away from oil. Out of about $45bn exports in 2022, only $10bn was non-crude, according to the National Bureau of Statistics (NBS) data.
Exports mean more demand for the country’s goods and services outside the country. At the same time, imports show that a country heavily depends on other countries’ currencies, which will primarily affect its currency value.
A further review of the OEC data gives further insight into Nigeria’s export and import scenario.
The country spent more dollars importing products than it earned in 2021.
The importation of refined petroleum has significantly contributed to the country’s import bill, which requires foreign exchange. A review of the OEC data shows that refined petroleum took 18.3 percent of the country’s import bill in 2021.
Nigeria spends 15 to 20 percent of its foreign exchange on importation of petroleum products.
Aside refined petroleum taking some of Nigeria’s foreign exchange, the country is reliant on crude oil for a substantial part of its exports, meaning that a fall in the price of crude oil in the global market will affect the value of the country’s export and its ability to earn foreign exchange.
A fall in global crude oil price in 2020, according to a review of crude oil prices posted by the CBN, meant that the country’s export value fell to $43.1 billion from the $64 billion posted in 2019. In the same period, imports increased from $51.8 billion to $52.5 billion.
According to a review of the NBS data, the country’s policies such as the devaluation of the naira and the adoption the NAFEX exchange rate to encourage exports have not helped it become less dependent on crude oil, as the mineral accounted for 78.7 percent of its exports in 2022.
Import substitution or export-led economy?
Import substitution is a strategy of replacing imported goods with domestic products. An export-led industrialisation involves the promotion of export of locally-made products. China, India, Brazil and the United States have run export-led economies for decades.
In 2015, the CBN barred 41 items from access foreign exchange in the local market. The list has since expanded to 44.
The apex bank cited the need to stabilise the foreign exchange market and ensure optimal utilisation.
Some items on the list are; rice, cement, vegetables and processed vegetable products, and vegetable oils, among others.
While data show a reduction in rice importation, Nigerians still spend millions of dollars importing rice, with the country needing more quantities of the crop from 2016 to 2021. reviewed
Nigeria is not an export-led economy owing to issues such as high production costs, port gridlocks, high energy costs, poor infrastructure and logistics, according to the Manufacturers Association of Nigeria (MAN).
Export-led economies earn huge dollars from shipping their products abroad. In July to September 2022, Bangladesh earned $10.274 billion from readymade garments exports, said the country’s Export Promotion Bureau.
Vietnam produced 158 million mobile phones in the first nine months of 2022, earning nearly $57 billion in foreign direct investment (FDI) in this area, according to the country’s General Statistics Office.
But Nigeria lags peers as it imports the majority of its needs from toothpick to packaging materials.
Despite the ban on vegetable products, more money has been spent on the importation of the items than was spent before the ban in 2015.
Although the country has recorded some increases in exports, importation of these products has continued to rise, adding more pressure on the foreign exchange market. This is a challenge facing the President-elect, Mr Bola Tinubu.
Economic stability
Nigeria has been hit by insecurity, from the South-East part of the country to the North-West region of the country, and virtually all parts of the country have been hit by one issue of insecurity or the other.
Analysts say this affects a country’s productivity and foreign investments, making foreign exchange earnings difficult. The next government is expected to fix insecurity to engender growth.
A Dataphyte report recently highlighted that the country’s FDI had continued to drop, signaling a drop in investor confidence.
The International Monetary Fund (IMF) has said that Nigeria must embark on foreign exchange market reforms.
Policies put in place by the CBN at various times such as banning the sale of dollars to Bureau De Change operators, ‘Naira 4 Dollar’ scheme, among others, have been largely ineffective, the IMF said.
The country’s most recent naira redesign has failed to halt the currency’s free fall and created a cashless society that brought the economy to a standstill in the first quarter of 2023.
Experts proffer ways forward
The Director of Research and Strategy at Lagos-based investment firm, Chapel Hill Denham, Mr Tajudeen Ibrahim, noted that the best way forward was to prioritise production.
“The country should prioritise production and add value to what it produces,” he noted.
Citing instances, he stated that Nigeria should export crude oil refined locally.
“Nigeria exports crude oil in its raw form and then buys refined petroleum from countries who sell to us at higher prices. Imagine that we have been able to add more value to crude oil and export beyond the raw form. Another example is that Nigeria produces cocoa in large quantities; we export cocoa in its raw form and import chocolate from other countries. Chocolate is produced with cocoa. Imagine if we add more value beyond just the raw cocoa. Adding value would help us to earn higher foreign exchange from our exports,” Ibrahim opined.
An economist and Director of the Centre for Promotion of Private Enterprise, Dr Muda Yusuf, blamed the CBN for moving retail foreign exchange transactions from BDCs to banks.
“It is regrettable that the CBN does not believe in the market mechanism. Yet, market systems are time-tested as instruments of efficient resource allocation in leading economies around the world. Of course, market failures are recognised in economics, and these are exceptions that can be identified and dealt with.
“Suppressing the market is like swimming against the tide. It is a difficult battle to win. Moving retail forex transactions from BDCs to the banks is like kicking the can down the road. The same issues would manifest even with the banks.”
He opined that the way out of the current foreign exchange dilemma was to give the market a chance.
“The way out of this foreign exchange conundrum is for the CBN to allow the market to function. It is also imperative for the apex bank to de-emphasise demand management and focus on strategies to stimulate forex inflows. A fixed exchange rate regime is a major disincentive to inflows and creates enormous pressure on demand for forex. It is a contradiction in terms,” he added.