The Nigerian naira is still in trouble as the country’s economy worsens and foreign direct investment (FDI) slows dramatically. The USD/NGN pair was trading at 462 on Wednesday, where it has been in the past few weeks. However, the real exchange rate, which people use is much worse, meaning that the spread has widened to 277.
Nigeria is facing substantial challenges
Nigeria, like other emerging markets is facing substantial challenges that have contributed to the plunge of their currencies. Naira, the country’s currency, has plunged by more than 30% in the past few years. This means that Nigerian savers have seen their investments lose substantial value.
Inflation is one of the biggest challenges that Nigeria is facing. Data published this week revealed that the headline inflation jumped to 22% in March this year. On a month-on-month basis, inflation rose by 0.13%. Analysts warn that the real inflation is much higher than the official figures.
Nigeria’s inflation will continue rising since the incoming president has committed to end subsidies in the energy sector. These subsidies have made Nigerians to pay some of the lowest fuel prices in the past few years.
At the same time, with the global financial conditions tightening, foreign direct investments (FDI) has dried up recently. Besides, foreign investors are now getting over 4% returns by simply buying short-term government bonds.
Data shows that FDI in Nigeria plunged to $5.3 billion in 2022 from the previous $6.7 billion. This happened because of the depreciating value of the naira, weak economic policies by the government, pre-election jitters, and insecurity.
Can the Nigerian naira be saved?
It is worth noting that the Nigeria naira is not the only emerging market currency at risk. The South African rand has plunged by more than 35% from the highest point in 2021. Similarly, the Kenyan shilling, the Zimbabwe dollar, and the Pakistani rupee have all been in a downward trend.
The collapse of the Nigerian naira is unique because it happened when oil prices were surging. To some extent, Nigeria has not benefited from soaring oil prices because it is a net importer. At the same time, the country’s trade deficit has widened in the past few months.
Saving the Nigeria naira will require tough choices, including shifting the economy from its overreliance of oil and gas and promoting local enterprises. Also, it requires belt-tightening by the government in a bid to reduce the overall budget deficit. The deficit widened to 3.3% of GDP in 2022 and is expected to hit 4.7% this year. Some of the actions needed to achieve this, including mass layoffs and ending subsidies are not popular.
Therefore, I suspect that the official and parallel exchange rate will continue to worsen to 500 and 800, respectively.
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