Nigerian Naira Plummets Against US Dollar as Central Bank Withdraws Support for Currency Traders

Assessing the Rising Costs of Imports and the Inflation Challenges Facing Nigerian Consumers

Over the past few weeks, the naira has experienced a significant depreciation, dropping by a staggering 0.12% or N1.80 against the greenback on January 10th, 2025. This means the naira is now trading at a mere N1,543.03 to the US dollar, a far cry from the N1,541.23 rate just the day before.

The problem doesn’t stop there. Naira has also taken a beating against the British pound, falling by a whopping N30.78 to trade at N1,889.29 per pound. The only bright spot is that the naira managed to gain some ground against the euro, appreciating by N5.48 to settle at N1,583.81 per euro.

According to analysts, the naira’s decline can be directly attributed to the Central Bank of Nigeria’s (CBN) decision to phase out its support for Bureau de Change (BDC) operators in the foreign exchange market. The CBN had granted these currency traders temporary access to purchase foreign exchange through the Electronic Foreign Exchange Matching System (EFEMS), a 42-day window introduced in December 2024 to stabilize the naira.

However, with that window set to close on January 19th, 2025, the market is bracing for the impact. The removal of the CBN’s support is expected to put the naira’s resilience to the test, as the foreign exchange market adjusts to this new reality.

In contrast to the official market, the parallel, or black, market has remained relatively stable in recent days. According to interviews with BDC traders, the naira was exchanged at N1,655 on the parallel market, with little movement in the exchange rate.

One BDC trader, who spoke on the condition of anonymity, said: “There is not much movement for the naira in the forex market. I buy dollars at N1,640 and sell to those interested at N1,650 and N1,655, and this has been the case for days now.”

The relative stability in the parallel market can be attributed to limited demand for foreign currency, as well as the CBN’s efforts to curb speculative activities and ensure a more orderly foreign exchange market. However, the impending closure of the EFEMS window for BDCs could disrupt this stability as the market adjusts to the new realities.

CBN’s Intervention and Future Outlook

The Central Bank of Nigeria has been actively involved in managing the foreign exchange market, with various interventions aimed at supporting the naira and ensuring its stability. In its latest move, the CBN has published the official exchange rates for the naira against other major currencies in the Nigerian Autonomous Foreign Exchange Market (NAFEM).

According to the CBN’s published rates, the naira is currently trading at:

  • N2.4157 per Chinese yuan/renminbi
  • N210.29 per Danish krone
  • N1,583.81 per euro
  • N9.7708 per Japanese yen
  • N410.7468 per Saudi riyal
  • N80.76 per South African rand
  • N1,685 per Swiss franc
  • N1,889.28 per British pound sterling

The central bank’s efforts to stabilize the naira have been met with mixed reactions from market participants and economic analysts. While some have praised the CBN’s interventions as necessary to maintain the currency’s value, others have criticized the central bank’s policies as unsustainable and potentially detrimental to the long-term health of the Nigerian economy.

Looking ahead, the outlook for the naira’s performance against the US dollar is bleak. A leading global research firm, BMI, a subsidiary of Fitch Solutions, has predicted that the Nigerian currency will decline further to N1,993 per US dollar by 2028. The researchers cite the country’s economic challenges, including its heavy reliance on imports for the medical device industry, as driving factors behind this forecast.

The report highlights that while Nigeria’s economy is projected to rebound, structural weaknesses, including a persistent naira depreciation, will intensify import costs for essential healthcare supplies and other critical goods. This scenario could have far-reaching implications for the Nigerian economy, particularly in terms of inflation, purchasing power, and the overall cost of living.

The depreciation of the naira against the US dollar has significant implications for the Nigerian economy, particularly concerning import costs, inflation, and the purchasing power of consumers.

As the naira loses value against the US dollar, the cost of importing goods and services into Nigeria rises. This can lead to higher prices for consumers, as businesses pass on the increased costs to their customers. The impact is particularly pronounced in sectors that rely heavily on imported raw materials, machinery, and other inputs, such as manufacturing, agriculture, and the healthcare industry.

The rising cost of imports can also fuel inflationary pressures, eroding the purchasing power of Nigerian consumers and making it more difficult for households to afford basic necessities. This, in turn, can have a ripple effect on the broader economy, as reduced consumer spending leads to lower demand for goods and services.

Furthermore, the naira’s decline can make it more challenging for Nigerian businesses to access foreign currency, which is essential for financing imports, servicing foreign debt, and engaging in international trade. This can disrupt supply chains, limit investment, and stifle economic growth.

The impact of the naira’s depreciation is not limited to the domestic economy. It can also have implications for Nigeria’s international standing and its ability to attract foreign investment. A weaker naira can make Nigerian assets and investments less attractive to foreign investors, potentially limiting the inflow of much-needed capital into the country.

Diversifying the Economy and Reforming the Foreign Exchange Market

To address the challenges posed by the naira’s depreciation against the US dollar, the Nigerian government and the Central Bank of Nigeria (CBN) will need to implement a comprehensive set of policies and interventions.

One key priority is to address the underlying structural weaknesses in the Nigerian economy that contribute to the naira’s volatility. This may involve diversifying the country’s export base, reducing its reliance on imports, and promoting the development of domestic industries and manufacturing capabilities.

The CBN will also need to continue its efforts to streamline the foreign exchange market and reduce reliance on the parallel market. This could involve further reforms to the BDC system, as well as the introduction of new instruments and platforms to improve the efficiency and transparency of the forex market.

The government and the CBN may need to consider implementing targeted measures to support key sectors of the economy, such as healthcare and manufacturing, to mitigate the impact of the naira’s depreciation on essential goods and services.

For instance, the government could explore initiatives to boost local production of medical devices and pharmaceuticals, reducing the reliance on imports and shielding the sector from the effects of a weaker naira. This could involve providing incentives for domestic manufacturers, investing in research and development, and streamlining regulatory processes.

Similarly, the government and the CBN could work together to support the manufacturing sector, which is crucial for job creation and economic diversification. This could include measures such as access to affordable financing, investment in infrastructure, and targeted tax incentives to encourage the growth of local industries.

By addressing the structural weaknesses in the economy and implementing targeted support for key sectors, the Nigerian government and the CBN should work to mitigate the negative impact of the naira’s depreciation and lay the foundation for long-term economic stability and growth.