12th March 2020 – speculations had started that the Naira had devalued. But now, 10 months later, the speculation has become a reality. On January 26, 2021, the exchange rate at the black market where forex traded unofficially depreciated at N480/$1. The exchange rate at the parallel market closed at N477/$1 on the previous trading day of January 22, 2021, representing a N3 drop.
Why is Naira depreciating?
- This can be attributed to demand pressure in the foreign exchange market as economic activities resumed in earnest following the end of the Christmas and New year holidays.
- Forex dealers also inform Nairametrics that an increase in demand from Nigerians looking to send their wards back to school abroad has also piled pressure on the demand for the greenback.
- A cross-section of importers have also resumed import activities piling pressure on the black market to meet their forex demands.
Nigeria – a patchwork of distinctive regions – deserts, plains, swamps, mountains, and steamy jungles. But also, the home of my most valued clients. Over the course of 2020, I have helped over 100 Nigerian business owners and Senior employees diversify their funds and avoid the complications of doing business with a single currency. So, why are my Nigerian clients so keen to stray away from just doing business in their home country?
Since the first quarter of 2020, Nigeria has faced an exchange rate crisis, triggered by a drop in oil prices. This crisis began after two of the world’s largest oil producers, Saudi Arabia and Russia, disagreed on how to proceed in regards to oil supply cuts, causing a price conflict that pushed oil prices to crash as low as under zero dollars. As well as this, the world became fully aware of the existential threat that is the COVID-19 pandemic, which has swept across the globe, affecting millions of people and businesses. These two events have had an impacting and lasting effect on Nigeria’s economy. As an economy highly dependent on crude, the oil price war meant Nigeria earned less from crude oil sales cascading to an even larger problem – Forex.
With the price of oil down, the pressure on Nigeria’s exchange rate has grown exponentially. This has caused speculations of Naira devaluation.
“If the situation persists it will lead to lay-offs,” he said. “If you are not producing, there will be a shortage of goods in the market, prices will go up.” – Muda Yusuf, director general of the Lagos Chamber of Commerce.
The Nigerian Naira has lost close to 30% in value within the last year, and more than 200% in the last 10 years. This situation has led to a spike in capital outflow as well as high unemployment. While greater attention has been placed on COVID-19 as the main cause of the economic challenges this year, the current Forex situation should be looked at as the cause of the existing structural and policy challenges that have been limiting the country’s FX earnings.
While we cannot neglect the adverse impact of COVID-19, a look at the country’s trade account last year shows that the country started a trade deficit run from Q4-2019, despite the buoyant oil price in the year. The drop in oil price and decline in volume due to militant operations depleted the Forex reserve significantly, the government had failed to devalue the Naira, and investors struggled to get Forex.
Forex reserves had been depleted below 40 billion before the end of 2019. In short, the first, second, and third devaluation are long overdue with added pressure from COVID-19.
Why did my clients choose the UK over Nigeria? The UK has a 200 year old system with a much more knowledgeable approach to dealing with coming recessions. A 2.855 trillion USD GDP in the UK compared to 397.3 billion USD GDP in Nigeria (2020), shows that the economic performance of the UK this year, despite the pandemic and hovering brexit deal, is balanced and secure. The UK thrives from “instability” in its market. When the Brexit deal is finalised and the Pandemic begins to wither, the strength of the pound and the UK market will thrive at a high level of success. Many Nigerians are opening business bank accounts in the UK, but why? Reducing exposure to one currency allows Business owners to diversify their funds and protect their funds against economic ruin. It provides financial security for their business, families and loved ones.