Why is Nigeria’s central bank struggling to let go of the naira?

Due to the global pandemic, a lot of aspects of our lives were affected by negative circumstances. Those negative circumstances can be characterized with different rates, however, the influence on the global economy is the one that affects everyone’s life. When it comes to something that has such a major influence as covid you cannot blame anyone for that because it is a health-related issue but the outcome that we are facing right now is very tragic. A lot of people lost their jobs and tried to find many other ways to generate their profits and in some countries, national currencies are not controllable anymore. It is not a surprise that developing countries appeared to be especially vulnerable towards it while major economies are still standing steadily. Nigeria is not an exception in this case and the economic condition with the latest news is very negative.

The current situation in Nigeria

Despite calls from the International Monetary Fund and the World Bank for deeper changes and protests from firms, Nigeria maintains regulation on its naira currency. A free-floating naira, according to multilateral agencies, will help the economy survive future shocks. However, Nigerian authorities are concerned that inflation caused by a sudden devaluation would push millions of people into poverty.

The other week, central bank governor Godwin Emefiele denied the country was implementing a new foreign exchange management system, while vice president Yemi Osinbajo stated that the government would use a more flexible pace. What is causing the naira to depreciate, and why is it doing so? Few key facts about Nigeria’s currency and recent monetary policies are as follows: What has the naira been pushed to do?

The COVID-19 pandemic and oil price slump hit Africa’s largest economy, which relies on oil exports for 90% of its foreign exchange, sending it into its second recession in four years. It barely escaped contraction in the fourth quarter, but a decline in oil sales resulted in a $14 billion balance of payments deficit last year, depleting its foreign reserves. Next to this, we should also mention that the covid pandemic also affected the economy in a way that it increased the popularity of crypto-industry and Nigeria was not an exception in this case too. The country became one of the main hubs in Africa and the percentage of Forex trading brokers in Nigeria grew dramatically, as not everyone had a thorough understanding of the process, and their assistance and help played a major role, which in fact helped and stimulated the economy a bit, however it did not appear to be enough for the country that was undergoing the massive inflation rate even before the global economic pandemic.

President Muhammadu Buhari’s administration, which took office in 2015, has kept the currency excessively elevated as a source of national pride. In order to prevent a major official devaluation after the last oil price collapse in 2016, the Nigerian central bank developed a scheme of multiple exchange rates. The Nigerian Autonomous Foreign Exchange Rate Fixing, for example, is a market-determined rate for buyers and exporters (NAFEX).

The government is seeking a $1.5 billion loan from the World Bank to fund a 5.6 trillion naira ($15 billion) budget deficit this year. However, the World Bank expects Nigeria to do more to match the official exchange rate of 381 nairas to the dollar and other rates, such as NAFEX, with the official rate.

Summing It Up

Finally, to sum up, there are a lot of negative developments in the economic conditions in many different countries.  Those that were in very difficult conditions appeared to be affected even more than those who were developing their economy at a normal pace. Even before the global economic crisis, the Nigerian economy was undergoing an inflation rate of hundreds of percent, this is why the national currency at the time of writing the article is undergoing massive changes and fluctuation on a daily basis. However, it should be noted that there is not one specific formula for success and everything in the case of the economy is dependent on time and the recovery of many different currencies in the world, because the only naira is not capable of recovery on its own, as they are all involved in one chain.