Nigeria naira (USD/NGN) collapses amid multiple headwinds

on Feb 17, 2023
  • The Nigerian naira has been one of the worst-performing currencies.
  • It has crashed by over 27% from its 2020 lows.
  • Naira scarcity, oil crisis, and upcoming election are key headwinds.

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The Nigerian naira collapse is still underway amid an ongoing scarcity, fuel shortage, and worries of next week’s general election. The USD/NGN exchange rate was trading at a record high of 460 on Friday, meaning that it has surged by over 27% from its lowest point in 2020. 

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Nigeria oil crisis

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The USD to NGN exchange rate has been in a strong bullish trend in the past few months. While the pair is trading at 460, the reality is that the real exchange rate is difficult to know. That’s because the rate offered by banks is significantly different from what is offered in the black market.

The collapse of the Nigerian naira is a sad tale of poor governance and macro policies. For one, Nigeria ought to be doing well, considering that oil prices have surged from negative during the pandemic to over $80 per barrel. Nigeria is the biggest oil exporter in Africa.

The Nigerian naira has not benefited from the soaring oil prices for three reasons. First, Nigeria does not have adequate refinery capacity. Therefore, it exports its crude oil and then imports refined products. 

Second, Nigerians enjoy some of the lowest petrol prices in Africa because of increased subsidies by the government. As such, the budget deficit has continued widening as these subsidies have grown.

Finally, Nigeria’s oil production has consistently lagged the quotas set by OPEC+ because of aging infrastructure. Therefore, if oil prices drop, as some analysts expect, we could see a worse deterioration of the economy. This is notable since oil accounts for the biggest share of Nigeria’s economy.

Nigeria naira scarcity

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USD/NGN chart by TradingView

The USD/NGN has also surged because of the overall currency shortage in the country. In the past few months, the Nigerian central bank started to transition to new-generation notes. While these transitions are common in other countries, Nigeria seems to have botched its process.

As a result, a major currency scarcity has happened, leading many Nigerians to shift their holdings to US dollars and even bitcoin. It has not been uncommon for people to travel for long distances to find nairas. 

Meanwhile, there is a major general election scheduled for February 23. In most cases in Africa, currencies tend to decline towards a general election because of violence risks. Therefore, we can’t rule out a situation where the USD to NGN exchange rate continues rising in the coming weeks.

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