Will Tinubu save the plunging Nigerian naira?

The Nigerian naira remained under intense pressure after the country published results of its closely watched election. Google quotes the USD/NGN rate at 460, where it has been in the past few months. However, the real exchange rate on the ground is actually higher than that. And, many money transfer companies, including Wise and WorldRemit are not accepting USD to NGN transactions.

Nigeria’s naira crisis to continue

The Nigeria naira has been in trouble, as we have written in several articles recently. It has crashed against most currencies, including the British pound and the euro. Indeed, the EUR/NGN has soared to 490 while the GBP/NGN has jumped to 552. 

This decline happened as investors remained concerned about the country’s economy and central bank policies. In the past few months, the Nigerian naira scarcity has only gotten worse. Unfortunately, there are signs that the situation will only escalate after the just concluded election.

Nigerians elected Bola Tinubu as the new president to replace Muhammadu Buhari. Therefore, since the two are members of the same party, we could see the situation remain intact. We have seen this in other countries before. For example, South Africa has continued to deteriorate under the leadership of the ANC party. 

The main reason why Tinubu will not save the Nigeria naira is the country’s giant petroleum subsidy that costs about $13 billion every year. This subsidy helps ensure that Nigerians have some of the lowest petrol prices globally. 

Nigerians pay about $0.4 per liter compared to Rwanda’s $1.4 and China’s $1.2. Ending the subsidy could make him an unpopular president. In a not, analysts at JP Morgan said:

“The next president will be tasked with a course correction anchored on sound economic policies, fiscal and structural reforms, as well as monetary policy orthodoxy. The top policy priorities are clear with fuel subsidy reforms and the liberalization of the foreign exchange market.” 

Naira to depreciate further

We believe that the Nigerian naira will continue depreciating further in the coming years. That’s because of the substantial difficulty of turning around a giant economy like Nigeria. Nigeria depends mostly on crude oil and natural gas and the situation could get worse if prices drop, as we expect. Tinubu wants to increase oil production to 1.5 million barrels per day.

At the same time, there is a challenge of remittances flow to Nigeria since many companies are no longer supporting these transactions. Most importantly, tech investments that fueled a significant increase in foreign direct investments (FDI) have all dried up. FDI plunged by 52% to $698 million in six years to 2021.

Therefore, the outlook of the USD/NGN is bullish, considering that the Federal Reserve is squeezing emerging market economies with high-interest rates. In the past few weeks, Fed hawks like Loretta Mester have insisted that the bank should hike by 50 basis points in March.