Navigating Naira's Exchange Rate Challenges: The Quest for Short-Term Liquidity and Long-Term Stability


By Chinedu Okoye 


Summary :

 • Naira faces challenges in its exchange rates, with some stabilization in official rates but continued fluctuations on the black market even though the Naira settled at N1113/$1 on October 27th.

 • The government has secured 70% of it's $10 billion influx announced by the Finance Ministry. The Naira has gained support from funds raised through the securitization of NLNG dividends.

 • Fears remain that, this boost may be short-lived due to Nigeria's import dependence for both essential and non-essential goods and services and leaving it exposed to external shocks. 

 • The above can be a deterrent to both local and foreign investments creating a scenario of stagflation. 

 • The Central Bank is urged to adjust its exchange rate policy, prioritize essential sectors, and consider a managed floating exchange rate to support economic growth and stability.


Calm at both NAFEM and P2P or Black Markets on Liquidity Support:

In the realm of currency exchange rates, the Naira experiences a tumultuous journey. While there's some stability in official rates, it still hovers around N799/$1 levels it recently surpassed, hitting an all-time low of about N900/$1 prior.

Finance Minister Mr. Wale Edun, on a Monday October 23rd made an announcement, that brought some optimism by revealing that the Federal Government is anticipating an influx of FX amounting to $10 billion.

As of October 27th, they have already secured $7 billion, mainly sourced from the securitization of NLNG dividends.The primary objective of this endeavor was to anchor the Naira against the US Dollar, a goal shared by both NAFEM and the P2P market participants


Mean Reversion from a short-lived liquidity boost:

This short-term boost is much-needed, but questions linger about its sustainability. Despite the influx of $7 billion and an expected additional $3 billion, the Naira's long-term stability remains uncertain and it's strength in doubt. 

This is because the Naira, like any other currency, is likely to revert to its mean value eventually, given unaltered structural fundamentals. Nigeria's continued dependence on imports and it's vulnerability to external shocks and exchange rate pressures contribute to this uncertainty.


The need to Modify Exchange Rate Policy:

A substantial transformation is imperative. As I've emphasized numerous times before, the current Central Bank's policy on exchange rates will continue to tighten financial resources as importers of both essential and non-essential goods and services troop into an unrestricted FX market. 

In that scenario, inflation and price volatility will surge, eroding corporate earnings and consumers real disposable income.

The capital influx will eventually be used up, and unless there are significant improvements in FX earnings, or the structure of the country's balance of payments, the Naira could face a regrettable free fall. 

In light of this assertion, I find it imperative that the Central Bank makes subtle changes to align its exchange rate policy with industrial and economic development and  goals. This makes for a more efficient use of the Countries scarce Foreign Reserves. 


Prioritizing Essential and Strategic industries to avoid stagflation and a case for a Managed-Float.

Prioritizing essential and strategic industries in
distribution of Foreign Exchange is critical for the nation's economic stability as some industries are more essential than others. Petroleum Motor Spirit (PMS) for example affects both the production, distribution and selling costs of a wide range of goods and services. 

Neglecting this reality could lead to a situation where prices soar due to exchange rate deterioration and volatility with the economy contracting in tandem. 

This would squeeze consumers' real disposable income and business earnings, causing industrial development to stagnate and component and consumer goods prices to skyrocket. Aggregate demand falls as a result and the economy begins to contract.

This possiblilty begs for a managed floating exchange rate policy where crucial items like PMS, industrial machinery, etc., essential for production activities and economic growth, receive prioritized support, in the form of low stable exchange rates and a plan for a gradual reversal or phasing out of the policy as opposed to the outright reversal. 

While it's unwise to artificially bolster the Naira beyond market forces, intervening to manage the supply and circulation of the US Dollar appears prudent to cushion or negate fall outs from further decreases in, business earnings, real disposable income and overall welfare. 


Expected Output effects:

Credit quality and price stability: Inflationary pressures reduces credit quality, availability as interest rates rise and banks and other institutions become averse to credit. 

Interest Rate Risks: It also may lead to interest rate risks as the Bank looks to curb inflation by increasing or leaving benchmark rates at current levels.

Challenges to Sustainable Development: With the risks above to consumers and businesses hit by decreasing real disposable income and earnings respectively the current policy doesn't seem very compatible with Nigerian sustainable development goals.

Despite the short term ease, long term pain lingers on if the Apex Bank sticks to its aggressive exchange rate policy. 

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