The recent statement by the World Bank to the effect that the Central Bank of Nigeria (CBN) must ramp up actions to reduce pressure on the currency market to meet ballooning demand for hard currency in Nigeria is quite instructive. The admonition could be the recipe for shoring up the nation’s currency, the naira, which has been in a free fall over the years due to mainly to dollar pressure.
Even though the multilateral lender supports the restart of dollar sales following five months of break, “continued and even stronger action and a clear commitment from the central bank will go a long way towards facilitating a stronger recovery,” World Bank country director, Shubham Chaudhuri, said in an emailed response to a query by Bloomberg recently.
Nigeria has been at the mercy of acute dollar shortage after the apex bank called off its weekly interbank foreign exchange sales in March. The coronavirus outbreak and lockdown of economies triggered a slump in the price of oil, which contributes over 90 per cent of the nation’s foreign exchange earnings.
Dollar tap of oil money into Africa’s biggest oil producer has been running dry following a record oil crash in April, setting in motion a 43.2 per cent fall in foreign exchange inflow in May, the CBN said in its monthly economic report for May.
Importers and businesses have said CBN’s moves to strengthen the naira and shore up dollar reserves have hampered their operations and ability to repay dollar debt. On penultimate week, London-based Financial Times reported that the Azura Power Plant, financed in part by the private-lending unit of the World Bank, might default on its dollar-denominated debt on account of dollar scarcity.
“The Azura case is just one example of the difficulties that a number of established foreign and domestic private firms in Nigeria have had in accessing the forex to meet their business and contractual obligations,” Chaudhuri said.
From banning the use of middlemen in import transactions to calling out exporters that don’t repatriate proceeds, the CBN is trying to avert devaluing the naira again.r President Muhammadu Buhari recently directed the regulator to halt forex for importation of food and fertiliser. Since the Godwin Emefiele-led CBN was forced to devalue the naira twice, the local currency has lost a quarter of its official value.
The Nigerian naira fell to its lowest level against the dollar in three years on the black market penultimate Tuesday, traders said, a day after a historic oil price rout pushed U.S. crude futures below zero. The naira touched 420 per dollar on the black market, for the first time since February 2017, 14 oer cent weaker than the official market rate.
The currency has been hitting new lows on the over-the-counter spot and black markets on thin volumes since last month after the central bank adjusted the naira’s official rate, implying a 15 per cent devaluation. It was quoted at a low of 388.92 on the spot market penultimate Tuesday.
A lockdown of Nigeria’s main cities in March to stop the spread of the coronavirus has slowed activities in the economy and the currency market particularly with the central bank running scanty operations and traders working from home. A crash in oil prices will also hurt the oil-producing country.
“It’s all about the corona pandemic and until the lockdown is lifted, we don’t expect improvement in liquidity,” one trader said.
The naira also weakened on the forward market. One-year dollar/naira non-deliverable forwards stood at 498.5 points, weakening from Monday’s close of 492.4, Refinitiv data showed.
Dollar demand has been swelling and piling up pressure on the naira, traders said. Importers with past due obligation are scrambling for hard currency while providers of foreign exchange such as offshore investors have exited.
Another major step towards shoring up the naira is the diversification of the economy from oil dependency. To this this end, the Minister of Mines and Steel Development, Arc Olamilekan Adegbite, recently declared that the federal government is committed to diversifying Nigeria’s economy from oil to agriculture and mining.
Adegbite, who stated this in Ibadan during a courtesy visit on Oyo state governor, Engr Seyi Makinde, stressed that the federal government is presently encouraging state governments to embrace the diversification. Specifically, the minister disclosed that the essence of his visit to Oyo state was to spread the gospel of mining to the state as part of the moves towards ensuring diversification of the nation’s economy.
“We are in Oyo state essentially to spread the gospel of mining all over Nigeria. President Buhari, since assumption of office, has tried so much to diversify the economy, especially through the mining sector and agriculture. We have relied so much on oil and gas and whenever the vagaries of the oil prices happen in the international market, Nigeria catches the cold; our economy is in tatters,” he said.
The minister added, to avoid over-reliance on the oil sector there was “massive injection of efforts and campaigns into agriculture, which has started yielding results.”
While urging the CBN to heed the admonition of the World Bank on the dollar pressure, it is expropriate to advise the managers pf Nigeria’s economy to accelerate the efforts at diversifying the economy as the sustainable solution to import dependency and its consequential dollar demand.