Nigeria’s Woes: The Naira Story
If a picture is worth a thousand words, than here is a 3,460 word essay which illustrates the problems Nigeria is having with its currency, and why I think the naira has further to drop.
Start with chart one, which shows the total amount of US dollars the central bank sells to commercial banks each month at its dutch auction sales. Clearly, something happened in late in 2008. With oil exports suddenly earning way, way less for each barrel, and foreign banks disdaining to renew lines of foreign credit to Nigeria’s banks, everyone turned to the central bank to get dollars. And the central bank began to get nervous, watching its reserves slip away, like water in a leaky bathtub.
Monthly US Dollar Sales At The Central Bank Of Nigeria, Millions
Cue chart two, the naira’s exchange rate (both official and parallel). At the end of November, the bank decided to let the naira go. If you look back to chart one, dollar sales returned to more typical levels, and the naira slid 20%. But then the public started to get nervous, as the naira began to head below the previous all-time low of NGN149/US$, and the psychologically significant NGN150/US$. So, on February 10, the central bank decided to scrap market determined rates and set the rate itself. It reverted to a stricter auction, where banks have to prove the dollars they request are for sanctioned transactions, and told the banks they had to sell to customers in a narrow band around the rate the central bank sold to them.
Nigeria - Official And Parallel Exchange Rates, NGN/US$
Well, as you can see, this had one nice effect and two unpleasant ones. Happily, the official exchange rate stabilised, just above NGN150/US$. But, the central bank can hardly breathe a sigh of relief. Dollar sales shot back up, as you can see in chart one. They weren’t as high as in 2008, but I think that was probably due to an artificial lack of supply, not a reprieve on the demand side. Why? Because, as you can see in chart two, the parallel, illegal exchange rate started to take off, heading near NGN200/US$ before the central bank decided to increase the supply of dollars again at the end of March.
Cue chart three. Through it all, reserves continue to slip. The hole in the bathtub hasn’t been fixed.
Nigeria - Foreign Reserves, US$bn
I only see a few ways out. Either the central bank lets the currency slide until it hits its market determined bottom – which I think they will do, eventually. Otherwise, they can hope that the demand for dollars drops – a recession could do that nicely, by reducing demand for imports, but you wouldn’t want to hope for one. The only other solution then is a pickup in dollar inflows, but the price of oil just won’t cooperate.