Senior Research Analyst at FXTM
Once
upon a time, the Naira was worth almost twice as much as the Dollar and
equivalent to the British Pound.
Fast-forward
today, the local currency is trading at a paltry N455 per Dollar, N585 per
Pound on the parallel markets and around N380 on the official exchange. The Naira’s story has been one filled with
many twists and turns revolving around Oil prices, multiple exchanges,
unfavourable economic fundamentals, Dollar scarcity, pegged exchange and
overall uncertainty. Will the Naira ever be able to return back to its former
glory? Given how Nigeria is still nursing wounds inflicted by COVID-19 and
falling Oil prices are threatening the country’s economic outlook, the
vulnerable Naira remains in the direct firing line.
For
Nigeria to become truly productive and break away from the chains of Oil
reliance, could a free-floating Naira be the solution? While an artificially
strong currency remains attractive for Nigeria based on the fact that most
products are imported, the negative impacts continue to be reflected across the
economy. Given how over 90% of foreign exchange earnings are sourced from Oil
sales, falling oil directly impacts Nigeria’s FX reserve which complicates the
CBN’s effort to defend the Naira. This dependence and heavy exposure to
external risks leave Nigeria open to currency instability and uncertainty.
The
question is whether Nigeria will be able to handle the aftermath from a
free-floating Naira. If the natural forces of supply and demand are allowed the
determine the equilibrium value of the Naira, a sharp depreciation could be on
the cards based on the macroeconomic conditions. Such may accelerate
inflationary pressures, forcing the CBN to potentially hike interest rates
while other central banks are cutting. All in all, the idea of a free-floating
Nigeria could elevate Nigeria’s economic prospects and offer transparency.
However, this will depend on whether the country had the ability to bounce back
from the potential pain inflicted by a tumbling Naira.
Investors
will direct their attention towers the pending inflation figures for August
which are forecast to jump 12.95%, its highest level 12 months. Inflationary
pressures are expected to rise over the next few months thanks to continued
border closes and coronavirus induced supply disruptions.
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