The Naira Is About To Lose A Lot More Value, Here’s Why

Crude oil prices have dropped to $36 per barrel, almost 45% less than the $57 at which the Muhammadu Buhari-led federal government built Nigeria’s 2020 budget on. At the same time, foreign reserves (Nigeria’s savings) have dropped to $37.5 billion in February, the lowest it’s been since 2017. Right now, the Naira is trading at N366 to a dollar, its lowest point in three years.

The International Monetary Fund (IMF) has also cut down the Nigerian economy’s growth forecast to 2% from 2.5% and all signs point to the Naira losing a ton of value in the coming months. Here’s why:

1. Oil prices are crashing. Fast.

A war of sorts between Russia and Saudi Arabia has resulted in both countries (who are also the largest exporters of crude oil in the world) producing way higher than levels recommended by the Organization of Petroleum Exporting Countries (OPEC). This overproduction means the oil market is flowing with excess crude oil thus dropping the price by about 30% to about $36 per barrel. 90% of Nigeria’s revenue (which will fund its budget and other responsibilities) come from crude oil. You get the picture.

2. Nigeria doesn’t export enough.

Outside of crude oil, Nigeria doesn’t export much of anything. By and large, the country still relies heavily on imports despite the efforts of the CBN and the government.

Without the capacity to manufacture at scale and diversify its exports considerably beyond crude oil, Nigeria’s economy will continue to be reliant on the fickle nature of the crude oil market. Closing the borders and other restrictions have so far proved ineffective at driving up manufacturing and exports.

3. Nigeria’s debt is staggering. And increasing.

With the new $22.7 billion loan approved by the senate, Nigeria’s debt will climb to $105 billion with over 65% of that being domestic public debt (or money owed to Nigerian businesses). This put the country very close to an unsustainable debt profile, especially since the Presidency didn’t include a repayment plan and Nigeria’s cost to service its debts have continuously risen in the past five years.

4. Of all OPEC countries, Nigeria is the least prepared for an oil price crash

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Other OPEC countries like Russia, Saudi Arabia and Canada all have significantly lower debt profiles and way higher foreign reserves to weather the storm. Nigeria, on the other hand, is depleting its foreign reserve rapidly and still taking on more debt. When Nigeria’s high population growth, 46% poverty rate and struggling economy are included in the analysis, the future looks quite dire for the Naira.

5. The Nigeria STock Exchange (NSE) has been on a decline

On Tuesday alone, investors lost N656 million on the NSE after the All-share index recorded a significant decline of 4.91%. That was after the market decline by 2.91% on Monday with losses totalling N329.39 billion. The stock market has been on this bear run for almost two weeks shedding almost 10% of its value.

All of these factors put immense pressure on the value of the Naira and even more pressure on the CBN to devalue the currency. According to CBN governor Godwin Emefiele’s plan, the devaluation will be carried out once Nigeria’s foreign reserves hit the $30 billion threshold. That could the Naira would be trading at N500 or more in the near term and inflation could increase dramatically. It’s hard to say, beyond increased cost of goods and food items, how people will be impacted directly, but it is something to keep in mind.