Fasten Your Seat Belt for Nigeria’s Exchange-Rate Storm


Keeping up with President Muhammau Buhari’s exchange-rate policy these days may not be an easy task, given its departure point. Buhari came to office in 2015 as a passionate advocate of a strong naira and opponent of devaluation. The economists were unable to convince him of its benefits, he told interviewers in those early days.

Two recessions in four years and a couple of forced devaluations later, it’s difficult to tell exactly what is the government’s policy on the value of the naira, even though there’s a diagnosis for the problem.

The ailment is that Nigeria is an oil-dependent economy that relies on petroleum exports for most its revenue and for 95 percent of foreign-exchange income. If the country produced most of its manufactured and finished goods, there would little need for imports, and a country with Nigeria’s oil exports could build up decent reserves that could be well invested as happened in Norway. As things stand, these oil-export receipts are the primary source of funding for the country’s massive imports.

President Muhammadu Buhari

With Nigeria not only oil-dependent, but also import-dependent, a huge portion of the receipts have to fund the imports of anything from essential food, medicines and machinery to expensive wines, cars and other luxury goods. That’s why when the oil market sneezes, Nigeria catches cold, because the ripples of every devaluation are felt through every fiber of Nigeria’s pricing system. And there are social, economic and political consequences.

Faced with these realities, the Buhari administration was in denial in 2015 amid plunging oil prices. It banned some imports from access to foreign exchange and introduced capital controls to protect the naira. Foreign-portfolio investors were jolted and they fled as Nigeria sank into its first recession in 25 years in 2016.

The government, through the central bank, ran a multiple exchange-rate structure featuring different rates for government transactions, small and medium-scale businesses in addition to an inter-bank rate; all of these shared a wide disparity with the parallel market rate, street prices that were the reality of most citizens. There were talks of round-tripping by some people who had access to the cheaper dollars, as they made more money reselling them in the parallel market, making more money in a jiffy than any other business could offer.

To win back reluctant foreign portfolio investors, the government in 2017 introduced the Investors and Exporters Trading window, also known as the Nafex platform, where a market-determined exchange rate prevailed, enabling foreigners to bring in money to invest in stocks, bonds and Treasury bills, and then take out the funds when they want with relative ease. This helped to stabilize the foreign-exchange market in the past two years, luring back foreign investors and even helping prepare the country for the devastation wrought by the coronavirus pandemic.

With Nigeria’s oil revenue projected to fall 80 percent this year, the exchange-rate pressure remains unrelieved. The Buhari administration has responded with more borrowing, from the domestic debt markets, sale of eurobonds and mulitilateral lenders such as the World Bank, the African Development Bank and the IMF, to further fill finance gap. Note that 80 percent of government expenditure is spent on the emoluments and upkeep of government officials, who constitute about one percent of the population, and the poor economics under-girding Nigeria’s governance for decades becomes clear.

So what are the implications for personal finance? The immediate one is inflation and its consequent erosion of naira savings. To illustrate the impact of foreign-exchange vulnerabilities on value, while it took just 150 naira to buy a dollar in 2015, it now requires 460 naira. There aren’t many investments that will give one a 200 percent profit margin to keep ahead of the curve. The worst would be to do nothing as the twin impact of rising food inflation and exchange-rate pressures will likely keep prices moving upward.

CBN Governor Godwin Emefiele

At least, one could take some remedial measures. The guiding principle should be to seek capital preservation and avoid risky assets. This would imply buying more bonds, Treasury bills and commercial papers, while avoiding stocks. But bear in mind at the same time, that with the prevailing low prices of valuable companies on the stock exchange, there may be opportunities for good equity bargains.

This is probably the time to explore a growing list of dollar-denominated investments being offered by several Nigerian banks, wealth and fund managers. They enable the purchase of equities, fixed income securities and even commodities through a diversified suit of mutual fund products.

It is also a good time to make real-estate investments, since the value of the money is being depreciated. Putting funds in a fixed asset gives liquid money an opportunity to solidify, allowing a new process of value appreciation to set in, very often outstripping the rate of inflation in the long term. Whatever the personal finance choices you make, be prepared, fasten your seat belt for the turbulent times ahead.