According to various media sources, chronic shortages of dollars in the largest economy in Africa have put pressure on the naira, depreciating to about N800/$1 on the black market.
A lack of offshore investors and an increase in oil thefts means that Nigeria needs to earn more forex. This development has reduced the liquidity of foreign currencies on the Nigerian currency market.
Nigeria's Currency Rates Get Out Of Hand
Per day, Nigeria loses about 700,000 barrels of oil due to vandals' nefarious activities, which amounts to the country's daily losses of about $60 million.
As a result, the FG is forced to break the Fiscal Responsibility Act by borrowing N8.80 trillion to cover the budget deficit in 2023. In addition, last week, the central bank of Nigeria announced it was replacing the N200, N500, and N1000 naira notes to target corruption and insecurity.
The decision immediately impacted the exchange rate the day it was announced, falling to about N775/$1. However, as of 28th October 2022, Nigeria's Eurobond yields have yet to hit junk status, with the ten-year bond yield falling to about 14.2%.
The government will unlikely be able to augment its forex needs from the bond market with high bond yields.
The lack of dollars and the cumbersome procedures in that many Nigerian banks handle their offshore operations have continued to hurt local businesses that rely on forex to fund raw material imports and pay for services.
They must resort to the black market to source forex at rates contributing to Nigeria's rising inflation rates. If this is not addressed, small businesses' challenges in sourcing forex might affect the GDP growth rate.
To address Nigeria's dollar needs, it will need to confront many obstacles, most of which take time to be resolved. The country's high borrowing cost and rising debt burden are greatly needed to shore up government revenues that have dwindled over the years.
However, this has meant the cost of borrowing is higher, and debt service eats into every naira of revenue received. As a result, the central bank has abandoned its lower interest rates policy switching to high-interest rates as galloping inflation rises to priority.
However, the decision is not likely to attract foreign portfolio investors. A move towards a market-determined exchange rate, as obtainable in Kenya, Ghana, and Egypt, is one popular solution among economists.
However, this is not a silver bullet, as Egypt and Ghana have shown their currency crisis. As a result, both countries are talking to the IMF for some form of bailout.
Though it helps restore investor confidence, more is needed for other deteriorating economic indicators like high debt-to-GDP ratios, inflation, and slow economic growth.
Oil theft is the only quick fix the government needs to address quickly. The government must therefore fight the oil theft situation head-on with strength and conviction.