Naira weakens to 1,705/$ at parallel market

The Nigerian naira has continued its downward slide in the parallel market, reaching an alarming exchange rate of N1,705 to the US dollar as of this week. This latest development adds to the economic strain that has plagued the nation in recent months, further exacerbating inflationary pressures and creating uncertainty for businesses and individuals dependent on foreign exchange for their operations.

The depreciation of the naira comes amidst ongoing challenges in the country’s foreign exchange market, with limited dollar supply, growing demand for foreign currency, and macroeconomic pressures that have intensified since the removal of fuel subsidies and other fiscal adjustments made by the government earlier in the year. The disparity between the official and parallel market exchange rates continues to widen, raising concerns about the sustainability of the current foreign exchange management regime.

### Factors Driving Naira Depreciation

The current weakening of the naira can be attributed to a range of factors, primarily the imbalance between foreign currency supply and demand in the market. Nigeria, as an oil-dependent economy, has seen fluctuations in its foreign exchange reserves due to volatility in global oil prices. Despite being Africa’s largest oil producer, Nigeria has been grappling with lower oil output, resulting in reduced dollar inflows from crude oil sales, which historically constitute a significant portion of the country’s foreign exchange earnings.

Additionally, the removal of fuel subsidies earlier in 2024 has led to increased costs of petroleum products and transportation, contributing to inflationary pressures. The rising costs of goods and services have prompted a surge in demand for dollars, as businesses and individuals seek to hedge against further devaluation and maintain their purchasing power.

Another factor is Nigeria’s inability to attract sufficient foreign investment to bolster its foreign exchange reserves. Uncertainty around the country’s economic policies, combined with the challenging investment climate, has deterred foreign investors, leading to a reduction in foreign direct investment (FDI) and portfolio investments. This has further compounded the scarcity of foreign currency in the market.

The Central Bank of Nigeria (CBN) has been attempting to manage the foreign exchange crisis by introducing various measures aimed at boosting dollar supply, including the unification of exchange rates, intervention in the market, and collaboration with commercial banks. However, these measures have so far failed to stem the persistent depreciation of the naira in the parallel market.

### Impact on Businesses and Consumers

The weakening naira has far-reaching consequences for businesses and consumers alike. For businesses that rely on imports, the depreciating currency has significantly increased the cost of importing goods, raw materials, and machinery. This has forced many companies to pass on the increased costs to consumers in the form of higher prices, further fueling inflation, which stood at 32.7% in September 2024.

In addition to import-dependent industries, manufacturers and retailers are facing challenges in securing foreign exchange for their operations. Many have resorted to sourcing dollars from the parallel market, where rates are substantially higher than the official market. This has strained profit margins and disrupted supply chains, particularly in sectors such as manufacturing, retail, pharmaceuticals, and aviation.

Consumers, on the other hand, are feeling the pinch of the naira’s devaluation through higher prices of everyday goods, including food, clothing, and household items. Imported products, which are essential for many Nigerians, have become more expensive, further straining household budgets already stretched by inflation. The increased cost of living is a major concern for the average Nigerian, many of whom are facing economic hardship as wages have not kept pace with inflation.

### Impact on Inflation and the Economy

The depreciation of the naira is a significant driver of inflation in Nigeria, as the cost of imported goods and services continues to rise. The country is heavily dependent on imports for many consumer goods, including food, electronics, and fuel. As the naira weakens, the cost of these imports increases, leading to higher prices for consumers and further eroding the purchasing power of households.

The rising inflation, in turn, has a dampening effect on economic growth. As consumers cut back on spending due to higher prices, businesses face declining demand for their products and services. This can lead to reduced production, layoffs, and overall economic stagnation. The weakening naira also makes it more difficult for businesses to plan for the future, as exchange rate volatility creates uncertainty in financial planning and operations.

In addition, the naira’s depreciation is making it harder for the government to manage its debt burden. Much of Nigeria’s external debt is denominated in foreign currencies, particularly the US dollar. As the naira weakens, the cost of servicing this debt increases, putting additional pressure on government finances and limiting the resources available for public investment and social programs.

### Government and CBN Response

In response to the continued depreciation of the naira, the Central Bank of Nigeria has reiterated its commitment to stabilizing the currency and curbing inflation. The CBN has implemented a range of policies, including tightening monetary policy by raising interest rates, which currently stand at 22%, and increasing interventions in the foreign exchange market to meet demand.

The federal government has also been exploring measures to attract more foreign investment, with the hope that increased dollar inflows will help stabilize the naira. Recent reforms in the oil and gas sector, such as the passing of the Petroleum Industry Act (PIA), are aimed at making the sector more attractive to investors. The government is also focusing on boosting non-oil exports, particularly in sectors like agriculture, manufacturing, and technology, to diversify the country’s foreign exchange sources.

Despite these efforts, analysts believe that the naira’s continued depreciation is likely to persist in the short term, given the structural issues facing Nigeria’s economy. Without significant improvements in oil production, foreign investment, and diversification of foreign exchange sources, the pressure on the naira is expected to continue.

### Outlook

The outlook for the naira remains uncertain, with many economists predicting that further depreciation is possible if the underlying issues in the foreign exchange market are not addressed. While the Central Bank and the government are taking steps to stabilize the currency, the current economic environment presents significant challenges. Rising inflation, limited foreign exchange reserves, and low investor confidence are likely to keep the naira under pressure in the near term.

For businesses and consumers in Nigeria, the continued weakening of the naira will mean higher costs and greater economic hardship. In the absence of a stable exchange rate, companies will need to adapt by finding ways to minimize costs and improve operational efficiency, while consumers will have to navigate the challenges of a rising cost of living.

In the long term, the success of Nigeria’s efforts to stabilize the naira will depend on the implementation of sound economic policies, diversification of foreign exchange sources, and a more competitive and investor-friendly environment. Until then, the naira’s slide against the dollar may continue, with ripple effects throughout the economy.