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The currency has fallen 20% on the parallel market since January driving inflation and challenging government strategy
At the heart of Nigeria's deepening foreign exchange woes is a paradox – that revenues from Africa's biggest oil and gas producer have been falling as energy prices spiral ever higher on the international market. Mainly, that's due to the lower output, militant sabotage and lack of investment which have pushed production levels down to 1.32 million barrels a day in April, compared with the state oil company target of 1.6m b/d (AC Vol 63 No 9, Oil spills and theft spike as big oil goes offshore).
The higher international prices haven't helped the federal government budget because they also push up the cost of the fuel subsidy which could run as high as US$16.2 billion next year, almost 70% higher than this year. The implications of this production-subsidy nexus means that oil earnings for the first quarter of this year were running at 1.23 trillion naira ($2.9bn), about 60% lower than treasury forecasts for the period, said Finance Minister Zainab Ahmed last month (AC Vol 63 No 14, Atiku and Tinubu clash on the economy).
Ahmed reckons the country's oil revenues will improve in the second half of the year thanks to tougher measures to combat oil theft and sabotage in the Niger Delta. But the country faces a harsh transition in the meantime – as food and fuel prices rocket (despite the subsidy) and pressure on the naira continues.
Towards the end of July, the exchange rate fell to N720=US$1 but has strengthened at the start of August. The acute shortage of foreign exchange is set to continue, testing the central bank's strategy of defending its official rate for the naira – despite the widening margin between it and the parallel rate.
The forex scarcity is hitting the productive economy hard, with manufacturers struggling to import raw materials and spare parts, driving prices up to record levels. Those factors would seem to be a secondary concern for Central Bank of Nigeria governor Godwin Emefiele, whose main focus is on maintaining his 'managed' and multiple-tier exchange rate policy.
In the short term, there is little prospect of Emefiele abandoning his managed forex policy for any of the proposed alternatives – such as a crawling peg system under which the naira depreciates against the United States dollar at a set rate each year. Neither could Emefiele float the naira under current market conditions without unleashing a rush for the exit.
Central bank officials argue that any sign that the government's resolve to defend the naira is weakening could trigger a fresh attack on the currency. That would support the bank continuing its 'batten down the hatches' strategy and restricting access to forex at the official rate. The naira will face some stormy seas over the next few months.
Emefiele's and the bank's credibility will be on the line. One glimmer of hope to watch are the central bank's boosted foreign exchange reserves – up to $39.3bn at the end of July from $33.3bn at the end of July 2021.
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