Nigeria VS Coronavirus: Cutting naira’s umbilical dependence on oil

In depth
This article is part of the dossier: How will Nigeria navigate the pandemic

By David Whitehouse, Patrick Smith, Ruth Olurounbi
Posted on Thursday, 21 May 2020 11:01, updated on Monday, 29 June 2020 18:43


The fragility of the reserves being used to support the naira and it's revalued rate shows that Nigeria needs to find new ways of earning foreign currency. In the first story of our series on the impact of COVID-19 on Nigeria, we look how its economy considers strategies to reduce the naira’s dependence on volatile oil prices.

This is part 1 of a series.

The downward trajectory of the Naira is one of the clearest indicators of the depths of the economic crisis triggered by the coronavirus pandemic and commodity prices in free-fall. Foreign reserves are down by about $10bn over the past year to $35bn and could not be relied on to shore up the value of the naira under the current extreme conditions.

With oil earnings set to halve this year, with more pessimistic commentators predicting a three-year slump, the government is looking for ways to accelerate its much-promised economic diversification plans and to make further cuts to what it considers unnecessary imports, such as consignments of rice from Thailand and Vietnam.

Naira’s future this year

Few bankers and officials are willing to speculate publicly where the naira’s dollar exchange rate could end up this year. In March, the central bank devalued the official rate of the naira to N360=$1. On the parallel market the rate is around N450=$1 and falling.

The naira “hasn’t found its real exchange rate value,” in the COVID-19 world, says Moses Ojo, chief economist at PanAfrican Capital Holdings in Lagos.

He continues: “There is a scarcity of foreign exchange which is beyond the control of the authorities in the short term.”

READ MORE: Nigeria encouraged to let naira fall further as currency market locks up

Current levels of foreign exchange will enable the country to be able to finance its food imports for only about five months, says Ojo.

He sees the danger of a vicious circle: a further decline in foreign reserves would affect the ability of businesses to import necessary inputs and raw materials. It might make them to source foreign exchange in the parallel market, which would raise their costs and hurt profits.

If the weak naira means that manufacturers lose their ability to import inputs, the crisis would take on the dimensions of “a perfect storm”, says Deji Olatoye, a corporate lawyer at The Lodt law firm in Lagos.

  • He says the government may use the opportunity to expand the list of imports which are either banned outright, or for which foreign exchange is not provided.
  • Foreign investors who are looking to repatriate their funds from Nigeria will have to be “patient”, Central Bank of Nigeria (CBN) governor, Godwin Emefiele, said this month.
  • Ojo says that the delay in repatriating funds will increase the pressure on the naira.

Solid minerals

In the short term, the central bank has enough reserves to be able to support the currency, says Mike Magaji, group chairman at Renaissance Media in Lagos. But beyond a year, he says, reserves won’t be sufficient.

A greater share of informal currency trade needs to be captured to realise the real value of the country’s foreign currency earnings, says Magaji. Regional trade receipts are not captured, says Magaji, adding: all that is documented is oil.

LISTEN: Coronavirus impact: “The naira is gone. It’s just a question of when”

“These receipts need to be brought into the formal economy,” says the group chairman.

New measures may be needed, such as import bans and promoting non-oil exports, which remain insignificant compared with oil. Nigeria has the potential to become a significant exporter of solid minerals such as columbite, gold and gemstones, says Magaji.

The immediate obstacle is constitutional.

  • Mining is an “exclusive list” activity, meaning projects can only be approved by the federal government.
  • Magaji argues that it should be put on the “concurrent list”, so that both state and federal governments could give licenses.
  • “Let the states invest and create jobs in mining,” he says.
  • The long production cycle involved means that the shift will take time. Financial institutions with a mandate to invest in solid minerals need to be developed, he says. Existing banks “don’t understand the extractive industries.”
  • The Nigeria Export-Import Bank should have extractive industries added to its mandate. “It’s a viable proposition.”

According to a briefing from PwC, Nigeria urgently needs a private sector funding policy initiative for mining to encourage banks to lend to the sector.

  • The Solid Minerals Development Fund (SMDF) needs to be strengthened and mandated to assist miners to achieve bankable status, PwC says.
  • The firm also recommends the commissioning of a study of the African Continental Free Trade Agreement on mining in Nigeria.

Bottom line: If the oil price collapse isn’t enough to prompt Nigeria to develop a more diversified economy to stabilise its currency, it’s hard to imagine what will.

For part 2, click here.

For part 3, click here.

For part 4, click here.

For part 5, click here

For part 6, click here. 

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