The Nigerian naira (NGN) is melting away and it is not alone

The Nigerian naira remained under intense pressure as the US dollar index (DXY) bounced back and as concerns about the economy remained. According to TradingView, the USD/NGN pair surged to a record high of 955 on Tuesday. The situation worsened in the black market, where the currency plunged to 1,305. This situation has pushed the spread between the official and the street exchange rate to almost 40%.

USD/NGN chart

Nigerian naira crash continues

The Nigerian naira plunge happened as the government revealed that inflation continued its uptrend in December. According to the statistics agency, the headline Consumer Price Index (CPI) in Nigeria surged to a 27-year high of 28.9% in December. This is much higher than the Central Bank of Nigeria’s (CBN) target of between 6% and 8%. 

Therefore, there is a likelihood that the bank will continue hiking interest rates to stem this inflation. The challenge is that it is unclear when the Nigerian Central Bank will hold its next meeting since its last one happened in July last year.

Economists have mixed views on whether interest rate hikes in emerging and frontier economies work well to stem inflation. In most cases, people in these countries don’t have enough savings in the first place. Also, high interest rates tend to affect economic growth by limiting lending and increasing non-performing loans (NPL) in the banking sector

Strong dollar and scarcity

The other challenge hitting the Nigerian naira is the ongoing demand for the US dollar from both individuals and companies. Most of these individuals are continually moving to the USD to hedge against naira depreciation. In a note, Mohammed Abubakar, the head of Forward Marketing Exchange told Bloomberg:

Dollar scarcity in emerging markets has escalated in the past few years because of the rising interest rates in the United States. The Fed has hiked rates to between 5.25% and 5.50%, the highest level in over two decades. This, in turn, has led to investors pulling money to US assets. 

The Nigerian naira is not the only EM currency that has plunged to a record low against the US dollar. In Kenya, the shilling plunged to 160 against the dollar, meaning that it has lost over 60% of value in the past three years.

Similarly, in Tanzania, the shilling (TZS) has dropped to 2,520, a few points below its all-time low of 2,540. In Turkey, the lira has slipped to 30, continuing a trend that has happened in the past few decades. Other top underperforming currencies are the Ethiopian birr, Zambian kwacha, and the Angolan kwanza.

The Nigerian naira and these other currencies will likely remain on edge as the crisis in the Middle East escalates. The impact of this crisis is that it has pushed inflation higher, putting the Fed in a bind when it comes to interest rate cuts. As such, hopes of a rate cut in March have now disappeared as Christopher Waller warned on Tuesday.