Naira Faces Dramatic Depreciation, Casting A Shadow Over Nigeria’s Economic Stability

Nigeria’s currency, the naira, has experienced a concerning drop in its value, raising alarms about the country’s economic outlook, according to data from Q3 2023.

Staggering Loss in Parallel Market

The parallel or “black” market witnessed the most significant setback, where the exchange rate plunged a staggering 23% from N770/$1 to N1000/$1. In contrast, the official exchange rate went from N769.25/$1 to N755.27/$1 by the end of Q3, as reported by Nairametrics.

External Reserves on Decline

Nigeria’s external reserves did not fare any better, slipping from $34.1 billion at the end of Q2 to a slightly lower $33.2 billion by Q3’s end. This decline further adds to the concerns regarding the country’s economic stability.

Forex Backlog to Blame

The Central Bank of Nigeria (CBN) cites a forex backlog estimated between $6 billion to $10 billion as a significant factor for the naira’s depreciation. The CBN governor, Yemi Cardoso, during his recent Senate confirmation, shared his views on the situation:

“Number one – it is that of which I’ll term an operational issue. Right now, we have a situation where we are aware there are unsettled obligations of the central bank whether it is $4bn, $5bn, $7bn, I don’t know,” Cardoso said. “But definitely, the immediate priority will be to verify the authenticity and extent of the unsettled obligation and once we do that, we need to look for a way to take care of it. It would be naive for us to think we will be able to make progress if we don’t handle that side of the foreign exchange.”

Implications for the Nigerian Economy

The weakened naira has brought several challenges for the Nigerian economy. Import costs have risen, driving inflation, eroding purchasing power, and turning away potential investments. According to the National Bureau of Statistics (NBS), the inflation rate reached 25.8% in September.

Outlook for the Naira

Following the currency redesign policy announcement by the apex bank in November 2022, the naira experienced a sharp depreciation. Experts anticipate further pressure on the currency throughout Q4 2023.

Analysts from Nairametrics suggest the CBN might avoid further devaluation if it fulfills its obligations to clear forex backlogs. Achieving this, however, may require the government to seek new loans from friendly nations.

On the flip side, without such measures, those with hawkish perspectives speculate the parallel market rate could exceed N1100/$1 by December. The rising demand for dollars is expected to peak during the festive season, combined with a trend of Nigerians aiming to emigrate or “Japa” in the coming year.