Nigeria’s infamously undiversified economy is in danger of dragging the country into yet another economic quagmire.
The Nigerian economy is completely dependent on oil prices elsewhere around the world.
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While at times in the past, this has been a cash boom for many of the more fortunate (or corrupt) in our society, this dependence has led to the latest in a long history of recessions.
The COVID-19 pandemic has devastated the global economy for over a year now, leading to a crash in the price of crude oil.
This in turn has hit Nigeria’s foreign exchange reserves and – combined with the other effects of the global economic shutdown – driven the country into a deep recession.
The Central Bank of Nigeria has been locked in an increasingly chaotic battle with inflation and steep depreciation of the Naira since the start of the pandemic.
Not only has the kitchen sink already been thrown at the problem, the CBN is starting to hurl hastily removed floorboard and essential plumbing fixtures.
But some analysts believe that the Nigerian economy and the Naira may be hitting a turning point.
Jeffrey Cammack, COO of FXScouts.ng – a Nigerian online Forex trading hub, points out that many Forex traders in Nigeria believe that the Naira will appreciate steadily over the course of the year as the country stabilises.
“We fully expect to see a rebound in oil prices as developed economies recover from the COVID-19 pandemic.
“The multitude of measures adopted by the CNB should also increase dollar inflows, further reducing pressure on the Naira.
“Dangers do remain though, and much can change in the next few months.”
Despite two “unofficial” devaluations in 2020, and a third more recently, the Naira remains under serious pressure and inflation is running at 16%.
It does not help that there are now three different exchange rates for the Naira: The official exchange rate used for budgetary decision-making (380 NGN/USD), the NAFEX rate for investors and exporters (410 NGN/USD), and the black-market rate (485 NGN/USD), which many consider to be a real reflection of the Naira’s value.
Both the IMF and the World Bank (which has frozen the delivery of a $1.5 billion loan until this mess is sorted out) have urged for the unification of the legal exchange rates and an overhaul of exchange rate policy.
So far, the Nigerian government has refused to countenance any such reforms for fears of stoking further inflation.
Instead, the CBN has launched yet another experimental project.
This one is called the Naira 4 Dollar Scheme and offers the recipients of remittances N5 for every $1 received from overseas.
While on the face of it, this does not seem like much (at the current black-market rate this is about a 1% bonus), it still has the potential to backfire spectacularly.
As Marcel Okeke explains, the problem with the scheme is the insinuation that foreign currencies used for remittance are legal tender in Nigeria.
One possible result of this experiment is the further devaluation of the Naira, further Forex speculation and continued capital flight.
But initial results are promising, as diaspora remittances have risen to over $30 million a week from $5 million a week previously and the black-market NGN/USD rate has been holding steady for the last week.
While this experiment is only due to run until May 2021, if it starts inflicting further damage, expect the CBN to pull the plug with haste.
How Nigeria and the Naira will fair over the next years will depend on much outside of Nigeria’s control.
Reports out of Europe indicate that the battle against COVID-19 is far from won in the more developed economies, raising the prospect of a further decline in oil prices.
Once again, Nigeria’s dependence on oil looks to dictate its future.
Ani Ben writes from Abuja
