Nigeria’s challenging foreign exchange reforms, led by President Bola Tinubu government, have not produced the desired results, with critics pointing out flaws in implementation. Within one year of Tinubu’s administration, the naira has depreciated by 65% against the US dollar in the official market, following two de facto devaluations by the Central Bank in its pursuit of a market-driven exchange rate.
Data from the FMDQ Securities Exchange Limited indicates that the naira’s value dropped to N1,339 per dollar as of May 27, 2024, compared to N463 in May 2023. Former Nigerian President Olusegun Obasanjo, a vocal critic of President Tinubu’s reforms, argued that the removal of petrol subsidies and the unification of FX windows were necessary but poorly executed.
Obasanjo stated, “Today, the government has made three decisions, two of which are necessary but poorly implemented, leading to economic impoverishment. These include the removal of subsidies, closing the gap between black market and official exchange rates, and dealing with a military coup in Niger Republic.”
In the parallel market, the naira depreciated by 49.47% over the past year, with the dollar trading at N1,500 compared to N758/$1 in April 2023. Initially, the naira rallied after the CBN settled foreign exchange obligations owed to manufacturers and local banks, introducing more transparent pricing. However, the CBN’s hawkish stance on interest rates, resulting in a 750 basis points hike this year alone, aimed to narrow the negative real return on naira investments and attract foreign inflows. Nonetheless, it fell short of curbing inflation, which reached a 28-year high.
Furthermore, Nigeria’s external reserves dwindled during this period, declining by 7.21% to $32.763 billion as of May 22, 2024.
The Nigerian Exchange Limited (NGX) disclosed a 36% decrease in total transactions within Nigeria’s equity market for April, totaling N346.23 billion. This decline, from March’s N538.54 billion, reflects cautious investor sentiment amid ongoing market volatility. The NGX All-Share Index experienced a significant drop of N3.57 trillion in April, primarily influenced by policy announcements favoring fixed-income securities by the Central Bank of Nigeria (CBN).
A detailed examination reveals domestic transactions fell by 49.27% to N225.40 billion in April, while foreign transactions increased by 28.19% to N120.83 billion during the same period. Institutional investors surpassed retail investors by 10%, with retail transactions decreasing by 54.89% to N100.77 billion and institutional transactions declining by 43.58% to N124.63 billion.
Over a 16-year period, domestic transactions decreased by 10.94% to N3.167 trillion in 2023, while foreign transactions dropped by 33.28% to N411 billion. In 2023, domestic transactions constituted 89% of total transactions, with foreign transactions comprising the remaining 11%.
The significant decline in the NGX All-Share Index in April was influenced by various CBN policy announcements, including a new commercial bank recapitalization plan targeting N4 trillion in fresh capital over two years and a 200 basis points increase in the benchmark interest rate by the Monetary Policy Committee (MPC), rising from 22.75% to 24.75%. This resulted in intensified sell-offs, leading to a 6% decline in the local bourse, with the index closing at 98,225.63 points, falling below the 100,000-point threshold reached at the end of March 2024.
Pressure on external reserves stems from several factors such as high demand for foreign currency to meet goods imports and service payments, limited investment inflows due to weak confidence, and restricted inflows from crude oil sales due to oil theft.
Charlie Robertson, head of Macro Strategy at FIM Partners UK Limited, highlighted Nigeria’s extreme currency move due to the long-standing disconnection between the currency exchange and the difference in US and Nigeria’s inflation rate. He noted Nigeria’s lack of an International Monetary Fund (IMF) program, unlike Egypt or potentially Ethiopia, which might have eased the shock.
Chinazom Izuora, senior associate at Parthian Securities, emphasized the multifaceted reasons behind the naira’s decline over the past year, closely linked to the decline in external reserves. She noted the well-intentioned unification of foreign exchange rates by the President Tinubu administration but highlighted challenges in policy implementation and change management.
The article also discusses gaps in stakeholder engagement, pre-implementation enlightenment, alignment of policy initiatives and agencies, and ensuring structural and systemic cohesiveness. It addresses issues concerning foreign currency supply, market structures, and systems improvement, underscoring the importance of completion and adequate time for market operators, stakeholders, and the public to grasp the policy implications before implementation.
Lastly, the appointment of Olayemi Cardoso as CBN Governor by Tinubu in September 2023, following the resignation of Folashodun Shonubi, and subsequent resignation of all deputy governors of the CBN under the former governor, is highlighted. Since assuming office, Cardoso has introduced new policies and adjusted existing ones to tackle FX demand pressure, increase dollar supply, and stabilize the Naira.
Sources: Business day
