The rapid depreciation of the naira has raised serious questions about the Central Bank of Nigeria’s (CBN) ability to stabilize the currency. Despite a series of interventions, including interest rate hikes and floating exchange rates, the value of the naira continues to decline, further increasing inflationary pressures and exacerbating the economic hardship faced by Nigerians. As the prices of daily necessities soar, central questions are emerging. Is CBN still in control or is Naira’s trajectory out of reach?
The weakening of the naira affects the economy as a whole, especially in countries that are highly dependent on imports. Nigeria imports about 69% of its goods, including necessities such as food and fuel. As the local currency depreciates, the cost of these imports increases, deepening the cost of living crisis. For businesses, particularly in the manufacturing and construction industries, the weak naira has increased input costs, threatening business survival and leading some businesses to close down.
“For businesses, particularly in the manufacturing and construction industries, the weak naira has increased input costs, threatening business survival and leading to the closure of some businesses.”
Small and medium-sized enterprises (SMEs) are particularly vulnerable. With borrowing costs rising, with interest rates reaching 32%, and loan conditions from banks becoming stricter, many companies are struggling to raise the funds they need to expand or even survive. This credit crunch extends to the agricultural sector, which relies on imported fertilizers and equipment, posing a direct threat to Nigeria’s food security.
Also read: Why CBN is losing the battle to stabilize the Naira
Disconcertingly, the naira continues to depreciate even though Nigeria’s foreign exchange reserves are reported to be increasing. Foreign exchange reserves amounted to $37.05 billion as of July 2024. In theory, increased foreign exchange reserves should increase confidence in the naira and provide a cushion against market volatility. However, the scarcity of foreign currency in the domestic market and the surge in demand have driven more Nigerians and businesses to parallel markets with significantly less favorable exchange rates. This divergence between official and black market interest rates provides fertile ground for speculation, further destabilizing the naira.
Nigeria’s structural dependence on imports is at the heart of currency instability. The country’s failure to develop a diversified industrial base has left it exposed to external shocks, and a weak currency has driven up the prices of imported goods. As economic strains rise, it is clear that monetary policy alone, no matter how stringent, cannot address fundamental vulnerabilities.
In an attempt to address these issues, the CBN introduced a floating exchange rate regime in 2023 with the aim of unifying Nigeria’s multiple exchange rates and reflecting the true market value of the naira. However, this strategy backfired, causing further market turmoil and perhaps intensifying speculative behavior. The widening gap between the official exchange rate and the parallel market exchange rate has raised concerns about the CBN’s ability to establish credibility in its currency management efforts.
The CBN’s reliance on aggressive monetary tightening as a means to curb inflation has also come under scrutiny. The recent hike in the benchmark interest rate to 27.25% is aimed at curbing inflation by suppressing consumption demand, but as a result, borrowing costs rise and credit access becomes difficult for small businesses and other sectors. It has become. In an economy heavily dependent on imports, higher interest rates do little to address the root cause of inflation: a weaker naira makes imports more expensive.
Ultimately, a more comprehensive and collaborative approach is required. The CBN’s actions need to be complemented by broad economic reforms that address Nigeria’s structural challenges. Fiscal authorities must play an important role in promoting policies that promote domestic production, reduce import dependence, and diversify the country’s sources of foreign exchange. Reforms targeting key sectors such as agriculture, technology and manufacturing could pave the way for greater job creation and reduce pressure on the naira by curbing demand for foreign exchange.
The fight to stabilize the naira is far from over and the CBN’s current strategy appears inadequate. Unless the root causes of Nigeria’s economic imbalances are addressed, the naira is likely to remain under pressure despite the central bank’s best efforts. If Nigeria is to avoid a deep economic crisis, a realignment of policies is needed, with a focus on structural reforms and restoring market confidence.
