Foreign Exchange Turnover Plummets by 71% as Naira Depreciation Deepens

Nigeria’s foreign exchange (FX) turnover has seen a sharp decline, dropping by 71% in recent weeks, amid worsening conditions for the naira, which continues to lose value against major global currencies. The decline in FX turnover—indicative of reduced trading activity and liquidity in the currency market—reflects mounting pressures on Nigeria’s economy as it grapples with challenges that include limited foreign currency inflows, rising inflation, and a growing demand-supply imbalance for dollars.

Analysts suggest that the tumble in FX turnover points to broader issues within Nigeria’s foreign exchange system. Lower turnover reduces liquidity in the market, exacerbating the depreciation of the naira and creating ripple effects for businesses and consumers alike. As currency traders and investors move cautiously, concerns mount that further depreciation could strain Nigeria’s economic stability, potentially driving up the cost of imports, fuel, and other essential goods.

Factors Behind the Decline in FX Turnover

Several factors have contributed to the dramatic fall in FX turnover. Firstly, Nigeria’s reliance on oil exports for foreign exchange has exposed the economy to volatility in the global oil market. While oil prices have rebounded somewhat, foreign exchange reserves have been slow to recover, limiting the Central Bank of Nigeria’s (CBN) capacity to intervene effectively in the currency market.

In addition to limited reserves, the CBN’s measures to curb FX outflows have impacted market activity. Efforts to reduce demand for dollars, such as limiting access to foreign currency for certain imports, have created a bottleneck effect, as demand from businesses and individuals outpaces supply. This has further weakened the naira in the parallel market, where the currency is trading significantly lower than the official rate.

Moreover, recent policies aimed at encouraging FX inflows, such as the CBN’s naira-for-dollar initiative, have not yielded substantial improvements in turnover. Despite offering incentives for remittances, inflows have yet to reach levels that can balance out the high demand for dollars, keeping upward pressure on the exchange rate. This imbalance has fueled speculation, as both businesses and individuals rush to hedge against further depreciation by holding on to foreign currency.

Implications of the Weakening Naira

The ongoing depreciation of the naira has several implications for Nigeria’s economy. Import-dependent sectors, such as manufacturing and consumer goods, are among the hardest hit, as higher costs of imported raw materials and equipment squeeze profit margins. For consumers, the naira’s fall means higher prices for imported goods, which, in turn, contributes to rising inflation and reduces purchasing power. Food prices, for instance, have been on the rise, impacting the cost of living for many Nigerians and heightening concerns over food security.

For businesses operating internationally, the weakened naira presents additional challenges. Importers and manufacturers who depend on raw materials from abroad are struggling with increased costs, forcing some to adjust prices upward to maintain profitability. For exporters, however, a weaker naira could offer some benefits by making Nigerian goods more competitive globally, but this potential advantage is limited by the country’s low production and export capacity.

Foreign investors, too, are feeling the impact of the currency depreciation, as it raises questions about Nigeria’s investment climate. With the current volatility, investors are cautious about entering the Nigerian market, which may further limit foreign direct investment inflows and reduce capital available for domestic growth.

Outlook and Potential Interventions

To stabilize the naira, the CBN may need to explore additional interventions, such as reassessing the official exchange rate policy or implementing targeted support for critical sectors. Increasing foreign exchange reserves through higher oil production or attracting foreign investments could also help ease the strain on the naira.

Experts suggest that addressing structural economic issues, including reducing Nigeria’s dependency on imports, could help alleviate some of the pressure on the currency in the long term. Enhancing domestic production capacity, especially in agriculture and manufacturing, could reduce demand for foreign currency by encouraging local sourcing of goods. Additionally, promoting non-oil exports could boost FX inflows, helping to stabilize the currency market over time.

While the short-term outlook remains challenging, efforts to diversify Nigeria’s economy and boost FX inflows could be pivotal in stabilizing the naira and promoting sustainable economic growth. However, without immediate interventions, Nigeria’s FX turnover is likely to remain constrained, and the naira may continue to face downward pressure.