As Nigeria prepares to celebrate its 50th independence anniversary on Friday, financial experts have identified weak foreign reserves, increasing appetite for foreign consumptions, policy inconsistencies and up beat in political campaign spending as some of the reasons responsible for the slump in the value of the national currency, the Naira, against other major foreign currencies.
“The reason is that the ability of the country to earn foreign exchange has a little bit reduced. Besides, the inability of the Central Bank of Nigeria to meet foreign exchange demand at its by-weekly auction is largely due to the steady reduction in the Nation’s foreign reserves,” the President Association of Bureau De Change Operators of Nigeria (ABCON), South West Zone, Jude Idimogu, said.
The Nigerian foreign reserves in mid September stood at US$ 36.6 billion naira down from the US$ 58 billion recorded in mid March 2008.
At the end of last week, the Naira also slumped to a record 154.9 naira to the dollar, the lowest level in more than a year and by Monday it dipped again to N155.5 in some banks.
Idimogu said: “Naturally, the reserves play an important role. When you are talking of pricing of foreign exchange in the economy, if you have weak reserves, of course you will want to sell most of your foreign exchange to the end users.
“I still believe that pressure now on the market is because political activities have commenced. Also, Nigeria is an import dependent country; we import most of our things. So the pressure on the Naira will continue to be there for sometimes to come for now.”
At the beginning of September, the CBN sold US$ 250 million as against the over US$ 380 million demanded by Banks.
The apex bank could also not meet demand for dollars for the sixth consecutive session at the foreign exchange (FOREX) auction last Wednesday as it could only sell US$ 400 million out of the US$ 646.2 million demanded by end users.
“When you look at the quantity demanded put before the CBN, it could just barely provide three quarters of it. So definitely those who did not succeed in their bidding will find other means to do the same business, they want to do. That means there will be pressure in the demand for foreign exchange”, Patrick Akamokhor, a financial analyst in Lagos, the commercial nerve centre of Nigeria, explained.
The experts blamed the high demand for foreign exchange on the end of the year rush by companies to increase importation and an economy that is basically import dependent.
The country depends on oil export for most of its foreign exchange income, which is the source of funding for the apex bank foreign currency auctions.
Nigeria is the seventh largest oil producing nation in the world and Africa’s largest. As a member of the 50-year-old Organization of Oil Petroleum Exporting Countries (OPEC), the oil cartel quota for daily production for the country is two million barrel per day.
These quota limits the most populous African country, which is facing various developmental challenges.
Due to the volatility of the oil market, its oil revenue declined as crude oil prices plunged in 2008.
Since the inflow of foreign exchange depends on oil exports, the value of its currency will invariably always fall when oil prices drop.
Apart from the falling volume of the nation’s external reserves, analysts said policy inconsistencies were another major problem facing the value of the Naira.
The implications of the dwindling fortune of the Naira are far reaching. More Naira will now be needed to get the dollar in order to import essential items which will invariably mean that prices of goods, services will be higher and expensive for the consumers thereby making live more difficult for the people.
“We must cut our foreign consumption and develop the real sector for home cons umption and export so that we can earn foreign exchange. That is one of the ways out of the dwindling state of the Naira. So since the ability of the country to earn foreign exchange is tied down to just crude oil, it is difficult for the CBN to meet the demand of end users,” the experts suggested.