Five Major Reasons Why Naira’s Value Depreciated Heavily in 2022 and Why It Will Continue in the New Year
- The Nigerian currency lost a huge part of its value both at the official and black foreign exchange markets
- There are several reasons why the naira fell so greatly in 2022; however five major stands out
- According to a new report, Naira's devaluation is expected to continue in the new year
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In 2022, the Nigerian naira will be remembered for setting several negative records in both the official and unofficial foreign exchange markets.
The naira touched an all-time low exchange rate of around N800 on the black market, while it fell to a record low of N461 to a dollar on the official market.
In fact, the naira consistently featured among some of the worst-performing currencies in the world according to Hanke’s Currency Watchlist.
Legit.ng presents five reasons why the Naira had a bad year and why the pressure will continue in 2023.
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High demand for dollar
One major reason why Naira suffered heavily is the high dollar demand for school fees payments, medical bills, tourism, importation of inputs, and other goods.
Dollar shortage
One recurrent theme during the 12 months of 2022 was the dollar shortage in the economy and it is expected to continue in 2023.
In a recent interview, CBN governor, Godwin Emefiele revealed that oil revenue Nigeria's major source of dollars has dried up from above $3bn monthly in 2014 to an absolute zero dollars.
Emefiele words:
"There is clear shortage of foreign exchange today. But yet as Bankers, we must meet the needs of our customers. Market is tight. And I know we don’t have a choice; we will have to do something to ensure that this problem is solved."
The shortage of dollars means that when Nigerians could not purchase dollars from the official market at the N450/$ average rate they had to resort to the parallel market.
The black market traders took advantage of more customers chasing very few dollars and selling above $700.
Dwindling foreign reserves
The CBN of Nigeria needs foreign reserves to meet the demand for forex, which will in turn ease the pressure on Naira.
In 2022, the reserves drop by 8.46 percent from $40.51 billion it started the year to $37.08 billion as at Thursday, 29 December 2022.
According to a report by FBNQuest research fourth quarter macroeconomic report, One of the reasons for the external reserves decline is due to the exit of foreign portfolio investors (FPIs) from Nigeria.
Part of the report reads:
“Nigeria is still challenged with limited FX inflows and high demand for foreign currency to finance imports and service payments.
“Worst still, receipts from oil are dwindling due to oil theft, and monetary tightening in advanced countries are expected to trigger capital outflows from developing countries.”
The report also noted that since the beginning of the year, investment inflow including portfolio, Foreign Direct Investment (FDI), and other investments into Nigeria have remained far below inflows recorded in 2019 before the COVID-19 pandemic.
Naira banknotes
Also, the new policy on naira banknotes creates pressure on the naira across the board.
When the redesigned plan was first announced by the CBN in late October 2022, it triggered a massive rush for dollars.
Black market traders took advantage of the rush exchanging the naira to the dollar as low as N850.
Foreign exchange policies
The Central Bank of Nigeria's foreign exchange management style has been criticized heavily by financial experts including the world bank.
Nigeria has multiple exchange rates for different official transactions and an unofficial exchange rate at which those who can’t access dollars from the Central Bank of Nigeria get their greenbacks.
According to the World Bank, the CBN's controversial foreign exchange management policy denied the various tiers of government in Nigeria a staggering $144.1bn.
Also, The World Bank has advised the Central Bank of Nigeria (CBN) to review the ‘Race to US$200 Billion In FX Repatriation (RT200 FX) Programme’.
The CBN's Race to US$200 billion in FX repatriation (RT200 FX programme) was designed to diversify foreign exchange sources with a goal of attracting US$200 billion over the next three to five years, external reserves have trended downwards in recent times.
World Bank noted that the policy will have a significant impact on the country’s foreign exchange.
Punch reports that the global bank explained people or businesses benefiting from the RT200 FX Programme will take advantage of the incentive offered by the central bank through the rebate scheme.
The World Bank report reads:
“The main component of this programme is a rebate scheme to encourage the repatriation and sale of export proceeds into the FX market.
“Despite the good intentions of this scheme, it has, in practice, created an additional FX window with a different (subsidised) exchange rate, even if transactions are executed through the I&E window.
“Moreover, with the rising parallel-to-official rate premium, incentives are created for agents to settle transactions outside of the I&E window at the parallel rate even after benefiting from the RT-200 rebate. This policy should be reconsidered.”
What to expect in 2023
The dwindling foreign reserves have left a shortage of funds for the CBN to continue its defense of the Naira against the US dollar, and other foreign currencies.
With the limited inflows from exports and low foreign investment inflows arising from a tough business environment, the naira exchange rate is expected to remain pressured in 2023.
Experts predict naira exchange rate to US dollar in 2023
In another report, Legit.ng revealed that the Nigerian currency naira had a tough 2022 trading against the dollar and other foreign currencies.
Experts have taken turns making predictions for the new year, and they feel it will be either good or more troubles.
The federal government in its 2023 budget set the naira to the dollar exchange rate at N435.57/$ for 2023.
Source: Legit.ng
