The Naira’s Plunge to N1690/$
The recent depreciation of the Naira to nearly ₦1690/$ in the autonomous foreign exchange (FX) market has sparked widespread concern about its ripple effects on Nigeria’s fragile economy. This decline, exacerbated by the Central Bank of Nigeria’s (CBN) reduced FX interventions, signals more than just a weaker currency—it points to deepening inflationary pressures that could further erode the purchasing power of millions of Nigerians.
Understanding the Root Cause
The CBN’s apparent shift away from FX auctions and the Dutch auction system to a “willing buyer, willing seller” model has strained liquidity in the FX market. In October alone, FX inflows from the CBN to commercial banks dropped by 30%, leaving the market unable to meet the surging demand for dollars. This has created a widening gap between dollar demand and supply, driving up the exchange rate.
Nigeria’s strong dependence on imports compounds the problem. From food items to fuel, the country imports a significant portion of its essential goods. A weakening Naira means higher costs for imported goods, which, in turn, directly fuels inflation.
How This Fuels Inflation
Rising Costs of Imported Goods:
A weaker Naira increases the cost of imported raw materials, machinery, and consumer goods. Businesses, unable to absorb these higher costs, pass them on to consumers in the form of price hikes. Essentials such as food, medicine, and technology become more expensive, placing further strain on households.
Fuel Prices and Transportation Costs:
Nigeria’s reliance on imported petroleum products means that a depreciating Naira makes fuel more expensive. Even with the Dangote Refinery coming online, the refinery’s pricing based on international market rates does little to cushion the blow. Higher fuel prices translate to increased transportation and logistics costs, which ripple across the economy, inflating the cost of virtually all goods and services.
Stagnant Wages Amid Rising Prices:
Inflation erodes the real value of wages, leaving workers with less purchasing power. For a country where the minimum wage remains painfully low and unemployment is high, this exacerbates poverty levels.
Investor Sentiment and Speculation:
The volatile FX market deters foreign investors, who see the weakening currency as a risk. This further reduces dollar inflows into the economy, perpetuating the vicious cycle of Naira depreciation and inflation.
The Dangote Refinery Factor
While the announcement that Ghana will import petroleum from the Dangote Refinery is a positive development for Nigeria’s export potential, it does little to address local inflation. The refinery’s decision to price its products based on international market rates, despite receiving crude oil in Naira from the Nigerian government, means Nigerians won’t see immediate relief at the pump. Instead, local consumers remain exposed to the global volatility of oil prices, which directly influences inflation.
What This Means for Nigerians
Higher Food Prices:
With a significant portion of Nigeria’s food supply being imported, the cost of basic staples is set to rise further. This will push more households into food insecurity.
Increased Cost of Living:
Everything from housing to healthcare will become more expensive as inflation takes root. The average Nigerian family, already stretched thin, will face even tougher financial choices.
Impact on SMEs:
Small and medium-sized enterprises, which form the backbone of Nigeria’s economy, will struggle to cope with higher import costs and declining consumer purchasing power. Many may be forced to downsize or shut down altogether.
The Need for Urgent Policy Action
The Nigerian government and the CBN must take decisive action to stabilize the FX market and curb inflation. Key measures could include:
- Reassessing FX Policy: While the “willing buyer, willing seller” model promotes market transparency, a balance must be struck to ensure adequate FX liquidity for critical imports.
- Boosting Local Production: Reducing dependency on imports by investing in local manufacturing and agriculture is crucial for long-term economic stability.
- Transparency in FX Allocation: Clear guidelines and fair access to FX are necessary to curb speculation and hoarding.
Conclusion
The depreciation of the Naira to ₦1690/$ underscores Nigeria’s deep-rooted economic challenges. Without urgent and targeted interventions, the resulting inflation will continue to erode the standard of living for millions of Nigerians. The situation calls for not just immediate policy changes but also a strategic shift toward self-sufficiency and economic diversification. Only then can Nigeria break free from the cycle of currency depreciation and inflation.
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