A Review of the Nigerian Energy Industry

Why naira is over 200 to the dollar

29 January 2015, Lagos – We woke up to news this week that the naira has for the first time crossed N200 to a dollar. It is something that we have dreaded for months even though many analysts predict this will happen. Unfortunately a lot of people have been caught up in this quagmire and do not know how to react. It is quite understandable to want to panic as many do not know what to do or how to approach the reality that your currency is now effectively 15 per cent less than it was worth. To think of what next to do, one must first understand why the naira became so weak and fallen so sharply in the last two weeks.

NairaWhy the naira dropped sharply

CBN Policies – Last week the CBN issued a new circular restricting the BDC and other authorised dealers from buying dollars at the Interbank. This circular followed so many others that were aimed and discouraging speculation and jealously guarding our fast depleting external reserves. However, the latest circular was quite stringent and was aimed at tightening liquidity.

This immediately caused an artificial scarcity as most BDCs did not have dollars to sell and also had very little to buy. The interbank market also spiked due to scarcity as dealers held back whilst trying to figure out what their next move would be. What happened next was that those who had dollars even saw reasons to hoard it even more speculating that things could get worse.

The CBN is basically not interested in defending the naira on behalf of those who buy dollars at the black market or without official documentation.

Interbank market – The players in the interbank market which include the big banks and major forex dealers also introduced some in-house rules that allowed them stop the sale of forex should it fall below two per cent a day. Also, this week they actually blanked out trading while their top dealers met behind closed doors to deliberate over CBN governor’s pronouncements. This off course spilled into the already volatile situation further depressing the value of the naira.

Demand from Politicians and Others – As the elections draw near, most BDCs and parallel market operators confirm that they have seen a huge surge in demand for dollars from politicians, government officials and the private sector.

They claim the uncertainty about who will win is making them sell a lot of their naira denominated assets sharply. They believe no matter the outcome some perceived friends of whoever loses may be victims of witch-hunting and so they are stashing up dollars just to ensure they have options. These guys I hear are ready to pay any amount just to secure the green back. This is actually why you see the high volatility in the price of the dollars with some buying at any price between N200 and N215 depending on who is selling; politicians are also buying in droves as they seek quicker ways to fund their campaigns. Whilst some of the reasons may not be fully factual, it is not unreasonable to believe that some politicians are buying up dollars in droves. A call to your local bank account officer should confirm that.

Demand from traders – Most traders, particularly those who import goods for sale also contributed to the spike in dollar prices. This is the period when a lot of them make orders as proceeds from Christmas sales fills up, waiting to be deployed for the New Year.

Unfortunately they are more at the receiving end of the CBN policies. The policy also insists dollar can only be sold to those with approved Letter of Credit. So for those who just prefer to buy at the parallel market, there was not just enough dollars for them to buy instigating a scramble for the few remaining.

Other Issues – Apart from the reasons above, other issues affecting the naira remain in focus and will still pile pressure on the naira till things improve. The fall in oil price for example is still a major issue as OPEC continues to protect its market share over the surging shale producers in the US. With crude oil prices still falling, the naira remains under immense pressure. In addition to that, the election uncertainty is still rearing its ugly head as foreign investors continue to exit their dollar cash flows rather than leave them in the economy. The strengthening of the US economy is also a concern as investors reduce their investments in emerging markets.

What do I do now?

The first thing you need to know is that 2015 is likely to be a difficult year financially. Now that the naira has been devalued and is facing constant depreciation it is obvious that your purchasing power is now less than what it used to be.

Secondly, if you can wait then I suggest you delay incurring any expenses or services that requires dollar outflows. Reason is that the volatility will still remain at least until after elections as you do not want to pay for an item at N215 to $1 only for the naira to strengthen the next day to N205 to $1.

Thirdly, you should also try as much as possible to reduce exposure to dollar expenses until your income adjust and rises to the new reality.

What has been your experience trying to buy dollars? Send me an email ugodre@nairametrics.com or tweet at me @ugodre. Also visit my website www.nairametrics.com for more personal finance tips.


– The Punch

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