Nigerians are bracing for more economic weakness after the local currency plunged to a record low against the US dollar. The official USD/NGN exchange rate soared to a record high of 1,645 on Monday as it crossed the important resistance point at 1,628, its previous all-time high.
The currency has plunged by over 112% in the last 12 months and by almost 90% this year, making it one of the worst-performing currencies globally.
Another risk emerges
The Nigerian naira plunge is facing another big risk as the price of crude oil retreat. Brent, the global benchmark, dropped below $75 for the first time in months. Similarly, the West Texas Intermediate (WTI) moved to $69.
There are signs that oil prices will continue falling. For one, the number of active rigs in the US has been in an uptrend in the past few months to stand at 485.
At the same time, hedge funds are still pessimistic about oil prices. A report by the Commodity Futures Trading Commission (CFTC) showed that speculative net positions by hedge funds dropped to 140k last week from 177k a week earlier. These net positions peaked at over 700 a few months ago.
Oil is an important commodity in Nigeria since it is the biggest export commodity. In 2023, oil exports totalled over $52 billion while petroleum gas jumped to over $9 billion. Therefore, falling oil prices mean that the country’s dollar receipts maybe under pressure in the near term.
Falling oil prices could benefit Nigerians slightly though since refined petroleum imports totalled over $20.7 billion in 2023. Analysts expect that Nigeria’s imports of these products will fall slightly now that Dangote’s refinery has started to refine gasoline.
Nigeria central bank decision ahead
The next important catalyst for the Nigerian naira will be the upcoming interest rate decision by the central bank.
Analysts expect that the CBN, which has been hiking interest rates will pause when it meets this month. The pause will allow the bank to see the progress on inflation, which is showing signs of stabilizing.
Recent data shows that the headline Consumer Price Index (CPI) rose 32.2% in August from 33.4% in July. It has moved to its lowest level in over six months, helped by the receding impact of last year’s devaluation and fuel subsidy removal.
Inflation has also eased because of the recent decision by the government to remove duty on wheat imports and higher corn yields.
The CBN has hiked interest rates to 26.75% to deal with the elevated inflation. Higher interest rates tame inflation by reducing consumer spending and incentivising savings in government bonds.
However, the Nigerian naira is still not attractive to money market investors since the yield is smaller than inflation rate. In a note, analysts at Bloomberg noted:
“Inflation’s gradual slowdown will likely see it falling below 30% in early 2025. Moderating inflation and a tough economy support holding interest rates next week.”
Why the Nigerian naira is falling
There are numerous reasons why the Nigerian naira has imploded even as other currencies like the South African rand and Kenya shilling rise.
First, the crash is a sign that the Nigerian economy is not doing well, as many manufacturers close shop. It is estimated that 700 manufacturers in the country closed their businesses in the first half of last year. Some foreign companies like GlaxoSmithKline (GsK) and Procter & Gamble (P&G) left the country last year.
Many Nigerian businesses are struggling because of the rising borrowing costs, which are mostly untenable. This explains why default rates are rising in the country.
Second, the Nigerian naira crash is also because of the falling foreign cash in form of venture capital in the country. While many Nigerian companies are receiving investments, the trend has been moving in the opposite direction. Nigeria attracted $1.75 billion in venture capital in 2021, a figure that dropped to $410 million last year.
Third, the central bank is working to clear the dollar backlog with companies that has weighed investments. The government is also considering selling oil to Dangote in local currency.
Nigerian naira outlook
The Nigerian naira’s short-term outlook is relatively scary, meaning that it could continue falling. If this happens, the USD/NGN exchange rate will likely continue rising as bulls target the next key resistance level at 1,700.
In the long-term, however, the Nigerian currency will likely bounce back as we have seen with other countries like Kenya and South Africa. In Kenya, the shilling crashed to 160 earlier this year and has now bounced back to 150.
Besides, the Nigerian government is taking measures that have been welcomed by top lenders like the IMF and the World Bank. For example, it has removed the fuel subsidy that was costing it $10 billion a year while 68% of its revenue is now used to service debt, a big improvement.
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