Contrary to the views expressed by some financial experts that the Central Bank of Nigeria (CBN)’s naira redesign policy will strengthen the currency, it has turned out to weaken it against the dollar.
The CBN introduced new currency notes on December 15, 2022, and set withdrawal limits for individuals and corporate entities. But a perceived poor implementation has led to shortages of the N200, N500, and N1,000 notes across the country.
Consequently, the naira has depreciated against other currencies, particularly the dollar. On the black market, the dollar-to-naira exchange rate increased from N736 in December 2022 to N765 in February 2023. Likewise, the Nafex or official exchange rate has moved from N449.05 in December 2022 to N461 in February 2023.
Factors that affect the exchange rate of foreign currencies to a currency include: interest rates, inflation, terms of trade, and public debt, according to economists.
According to a Fitch Ratings report, the naira shortage would lead to a rise in the country’s demand for foreign currency, weakening the local currency and eventually leading to scarcity of the foreign exchange. The naira shortages would also increase consumer spending, according to Fitch.
The local currency has depreciated significantly over the past few years, and the CBN has attempted several steps to stabilise it with mixed results. Since the first quarter of 2020, the bank has devalued the naira three times due to pressure on the country’s foreign reserves caused by reduced oil revenue.
Experts differ
No data have shown if the naira redesign strategy has directly or indirectly impacted Nigeria’s exchange rate, but Dataphyte spoke with a few experts on this.
Director of Research at Chapel Hill Denham, Tajudeen Ibrahim, noted that there was no connection between the exchange rate and the scarcity of naira.
“It is true that on the black market, the exchange rate is occasionally offered to customers who have cash at hand for a lower rate or is given at a higher rate where the transactions will be carried out via bank transfers. The naira shouldn’t naturally have an impact on the exchange rate because it is only scarce in physical form,” he said.
He, however, said that the conversion rate to the naira for cash transactions, particularly in the black market, would have an impact on the exchange rate.
An economist and CEO of the Centre for Promotion of Private Enterprise, Dr Muda Yusuf, stated that there was no relationship between the foreign exchange and naira scarcity despite that one of the justifications offered by the CBN for mopping out of the naira was to support the local currency.
“The only impact of naira scarcity is a decline in the general economic confidence. Most people are storing their wealth in dollars rather than naira due to the latter’s stability over the former.”
He added that he had found it difficult to draw a link between the exchange rate and the amount of money in use because, contrary to what the CBN believed, the naira continued to depreciate even after there was little money in use in the economy.
But another economist, Johnson Adire, differed, He said the current naira scarcity had forced an increased demand for the local currency, which was good for the economy.