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The Nigerian Naira Has Been A Bad Boy - And Here’s Why
Let's talk about Naira depreciation, the cause and effects, my not-so-humble opinion, and why sore throat is better than fever.
I was going to write a fun piece about the woes of sore throat, maybe a diss track or something, because I battled with it all week. At the core of it, it was like a relentless fire was burning at the back of my throat, making each swallow feel like a painful journey through hot coals.
I thought there was nothing worse than sore throat. But before I could gather enough ginger to write anything, the sore throat had graduated to fever. Now, I wish the sore throat could return and make the fever go away. I’m sorry sore throat; you were a better man than the ugly fever. #BringBackSoreThroat #JusticeForSoreThroat
That’s a true story, but I was getting somewhere with it…
When I moved to UAE, the exchange rate of 1 Dirham (UAE Currency) in Naira was 98. Back then, I thought that was really bad. Fast forward to today, and that same 1 Dirham stands at a whopping 326 Naira, which is about a 330% increase in roughly four years. Now, I find myself yearning for the days when 98 Naira felt like a burden. #BringBack98Naira #JusticeFor98Naira
The Point Of This Write-up…
Honestly, I didn’t understand much about the economics behind the Naira depreciation.
But personally, whenever I find a topic uninteresting to study, I just write about it, which forces me to learn about it unconsciously. So I did some digging, and lucky you, this is probably the most fun and realistic summary of the Naira depreciation situation you’ll ever find. Kay saves the day, again. You’re welcome.
I will be using USD as the reference currency.
It's important to emphasize that all information provided should not be regarded as professional advice or opinion. But if you decide to regard it as such, you might not be wrong because normal normal, I’m that good.
I’ll try to skip big grammar and detailed analysis. I’ll just break it down like we’re in kindergarten.
Weak Currency Could Actually Be Cool…
Hear me out.
In reality, the exchange rate is not expected to carry as much weight, as, sadly, it does in Nigeria.
Some countries, such as China, which are in the business of exporting, could prefer to have a weak currency. Why?
Because a weaker currency makes the country's exports cheaper for foreign buyers. This means locally made products will sell out quicker.
For instance, if TVs were made in Nigeria, and the Nigerian currency is weak, people from other countries would prefer to buy quality TVs from Nigeria for relatively cheaper. But that bright side is not so bright here, because what exactly do we even have to export in Nigeria?
Weaker currency can also stimulate the local market because people are forced to import less and consume more domestically.
For instance, tell me why the interior designer said a coffee table is 3 million naira because she has to import it. Well, why are you importing a coffee table, madam designer? You don’t have carpenters in Nigeria? Don’t be delulu.
In short, the depreciation of a country’s currency could be a plus for those exporting. But fairly, it makes life more difficult for those importing—because their purchasing power abroad is reduced.
Talking Of Purchasing Power…
In reality, whether the rate is 100 or 1000 shouldn’t make much difference. The true indicator is the purchasing power.
For instance, Ghana removed 4 digits from their currency in 2007. Such that, if your salary was 300,000 cedis, it became 30 cedis; if a TV was 50,000 cedis, it became 5 cedis; and if the USD exchange rate was 90,000 cedis, it became 9 cedis. Different figures, same purchasing power. It was a shift in mindset more than anything else.
Now, imagine if the Nigerian government decided to remove two zeros from the Naira today. A salary of 300,000 Naira would become 3,000 Naira, and a bottle of coke priced at 300 Naira would now cost 3 Naira. The dollar exchange rate would appear more favourable at 11 Naira per Dollar. But, in reality, it wouldn't change anything, because the purchasing power is still the same.
Meaning, the core issue isn't the number of zeros but our economic reality. We might feel better with fewer zeros on our currency, but it still won't address the fundamental problems.
The Fundamental Problems: Why Naira is Always Falling…
The Naira keeps falling, like raindrops from my eyes and teardrops from the sky.
This time last year, it was 700/$. Today, it’s 1175/$.
It prompts any reasonable human (or huwoman, in case you’re a feminist), to wonder, why is this currency always falling?
Well, it all comes down to the simple law of supply and demand. If the demand for dollars exceeds the supply, it impacts the exchange rate.
Previously, we had a fixed rate, meaning the Central Bank of Nigeria (CBN) had the burden of maintaining an official rate; we called it CBN Rate, which is why we had different rates from CBN and the black market. But people demanded more dollars than CBN could provide, so getting dollars from CBN was an annoying process, so we resorted to the black market, which drove up the black market rate.
Also, when CBN realised they didn’t have enough reserves to meet the demands and maintain the official rate seamlessly, they devalued the Naira and drove up the official rates, which was still far less than the black market rate.
At some point, CBN’s failure to provide as much foreign exchange for businesses started becoming more evident.
For instance, Emirates suspended its operations in Nigeria in 2022 owing to its inability to repatriate $85 million trapped in Nigeria. CBN was like, “ehmmm folks… we’d really love to pay you guys mehn, but we don’t have that much dollars at the moment, so take a chill pill, we’ll sort you later, let’s sort the people who need dollars to pay their school fees in Canada first, you hear? Habibi 😘”. Then Emirates was like, “Kalas, we outta here!“.
In essence, the demand for foreign currency is significantly higher than the supply. Why?
Why the demand is high…
People need a lot of dollars to import because we import a lot in Nigeria. That’s why the government started banning the import of certain products like rice. The government was like, “Heyo! Why are you people importing rice with dollars and driving up demand unnecessarily? We have rice at home, come off it”.
People need a lot of dollars to pay their foreign school fees, because we japa a lot in Nigeria.
Schools resume around September, so it makes some sense that demand will go up around this period, and the exchange rate will follow.
There are bad players who intentionally get dollars at cheaper rates from CBN and sell them off at higher rates on the black market. Na man dey do man.
Note: This list is not all-inclusive, but you get the idea.
And why are we not getting much dollar inflow (Supply)?
Dollar inflows to Nigeria come from five main sources: Crude oil sales, non-oil exports, foreign investment (direct and portfolio), external loans, and diaspora remittances. Unfortunately, dollar inflows from these sources have been declining over the years.
Crude oil revenue, our primary source of foreign exchange inflow, which could have catered for the dwindling liquidity, has been suffering a huge decline due to the 2020 - 2021 dip in crude oil prices and the 2022 decline in crude oil production. This means we’re not getting as much dollar inflow from oil as we used to in previous years.
Foreign investors are scared of investing in a dwindling currency. And that’s like a vicious cycle.
“I don’t want to water that plant because it seems it’s going to die anyway, and the plant is dying because I won’t water it.”
Imagine you’re rich (oh, sorry, no need to imagine, you’re rich). And you’re a foreign investor bringing in $100,000 at ₦500/$1 (about ₦50 million). Let’s say you make a 20% profit after 3 years, and you want to take your money out of the country. But now, the rate has changed (say ₦800), which means your initial $100,000 is now about $62,500, and even with your 20% profit, you’re going home with $75,000.
If you’re smart enough to have an extra $100,000 to invest, I bet you’re smart enough to know a bad business when you see one, and that, right there, is a bad business, Richie.
Tinubu And The Unification Of Exchange Rates
At some point, with excessive demand for dollars straining the CBN's reserves, the government had to succumb to their failure when they realised, “Oh, this headache of maintaining an official rate is really stressing us the hell out. Maybe we should just withdraw the official rate and let the market battle out the rate”.
Essentially, the government resorted to the adoption of an exchange rate that reflects the true demand and supply of foreign exchange in real-time. Meaning, there’s
no more CBN rate.
This Tinubu’s idea, to be fair, could have been a good one because, at the very least, it would get rid of the bad players. But the main problem is still there, which is that demand is higher than supply. And what happens when you let the market decide the rate in a situation where demand is significantly higher than supply? The exchange rate will keep going up.
I’m not even an economist, but that sounds logical enough to me.
Who Should We Blame…
It’s not my fault; I’m not the bride. It’s not your fault either; you’re not the bride.
Maybe it’s the government’s fault? I don’t even know if the government understands the issue, or maybe it’s beyond their power. Because the only real fix here will involve a good amount of foreign exchange supply, and that’s not something anyone can make happen magically, even if you’re the bride.
Or maybe it’s CBN’s fault? I don’t know. The CBN has been quite dodgy as they tried to blame everyone else but themselves. At some point, they blamed it on dollar savings, BDCs, black market rate aggregators like abokifx, and they even blamed it on accumulation of cryptocurrencies by Nigerians who lost confidence in the local currency.
But we have to blame someone, right? Maybe the gods are angry? Okay, that’s possible. Let’s appease the gods, and do some traditional sacrifices. But won’t it be funny if the gods say what they want for the sacrifice is dollar notes? Which we don’t have. Another vicious cycle.
Whatever Will Be, Will Be…
At this point, I’m tired of getting angry.
Maybe things will get better, maybe it won’t. The only guarantee is that we’ll be fine, or maybe we won’t.
The consolation is that whether the exchange rates get better or not, we’ll all die one day.
Now, 1175/$ may look bad, but wait till it gets to 5000/$. That’s when you’ll know that sore throat is better than fever.
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