Finance

Naira could suffer a new devaluation

Monday, 16 August 2021 18:15
Naira could suffer a new devaluation

(Ecofin Agency) - The value of Nigeria’s currency -Naira- has been gradually eroding over the past decade. This year, which marks a post-Covid-19 period, the currency is still slow in recovering and reaching its 2010’s position.

Over the past 10 years, the value of the Nigerian local currency has dipped by 171% against the US dollar. Today, the currency of Africa’s biggest economy by GDP is on the verge of a new devaluation.

According to information gathered by Ecofin Agency, the Naira was supported by three main pillars. These include a historic positive trade balance driven by the oil sector, strong foreign capital inflows, as well as a low external debt level. Data from the National Bureau of Statistics showed that the country conceded a gap of N4 trillion (about $9.8 billion) on its external trade in Q1 2021. In 2020, a deficit of N7.375 trillion was conceded; external debt amounted to $33 billion. In Q1 2021 alone, Nigeria allocated $1 billion for debt servicing, interest included.

Foreign inflows were only $2.7 billion in H1 2021, against $7.15 billion and $14.5 billion in the same period in 2020 and 2019, respectively. Also, government debt securities with a maturity of less than a year only attracted $1.2 billion. In 2019 and 2020, these instruments attracted $3.7 billion and $9.4 billion, respectively.

At the end of July 2021, the forex reserves stood at $34 billion, the Central Bank's Monetary Policy Committee says. Although it is higher than that in June, this amount is lower than the $35 billion in January 2021 and the record $44.6 billion in January 2018.

To get back on track, the monetary issuing institution has granted the exclusivity of Forex markets to commercial banks; currency exchange outlets, officially suspected of embezzlement, are excluded.

This pressure on the naira is also a challenge for large companies with foreign currency debt. Observers expect the difficulty in accessing foreign exchange to undermine their ability to meet short-term international commitments.  Rating agency Moody's has already pointed to such risks for Dangote Cement, Nigeria's largest company. The banking sector, a major borrower in foreign currencies, is also suffering the same challenge.

Further pressure on the Nigerian currency will weigh on purchasing power. In a country where most of the food needs are met by importation, the difficulty in accessing foreign exchange may increase the price of imported goods.

Recent data show that food inflation reached 21% in June 2021. If the situation continues, the value of the naira could depreciate rapidly on the black market.

Idriss Linge



 
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