Naira Hits Record Low of N1,740: What’s Driving the Fall?

The Nigerian naira has plummeted to a new low, reaching around N1,740 to the dollar in the parallel market this October, further intensifying concerns over the currency’s stability and the broader economic outlook. This drop, from approximately N1,705 in September, reflects a combination of factors, including mounting foreign exchange (FX) shortages, sustained high demand, and ongoing inflationary strains that have been challenging the Nigerian economy throughout 2024​.

Factors Driving Naira’s Depreciation

Several critical factors are contributing to the naira’s continued depreciation. Primarily, limited FX availability in Nigeria has widened the gap between the official and parallel market rates. Although the Central Bank of Nigeria (CBN) has attempted to manage FX supply, its efforts have struggled to keep up with high demand for dollars across import-heavy sectors. This high demand, in particular, far exceeds supply, especially as Nigeria imports the majority of its refined oil and essential goods, both of which require a steady flow of foreign currency. Consequently, this demand-supply imbalance has driven the naira to unprecedented lows in the unofficial market​.

Additionally, the country’s foreign exchange reserves, which serve as a vital indicator of currency stability, have shown declines recently. With decreased FX reserves, the central bank has a reduced ability to intervene effectively in currency markets, which further pressures the naira. Furthermore, global economic conditions—such as rising inflation rates in major economies and tightening dollar availability—have intensified this strain. Typically, such conditions increase the demand for the U.S. dollar, thereby impacting countries like Nigeria that depend on dollar transactions.

Inflation and Economic Consequences

The naira’s depreciation has far-reaching consequences for Nigeria’s economy. For one, a weaker naira increases import costs, which in turn drives up inflation on consumer goods, including essentials like food and fuel. Recently, the World Bank listed Nigeria as one of the top countries affected by food inflation, highlighting the significant impact on Nigerian households. Additionally, this depreciation is likely to impact businesses that rely heavily on imports, potentially causing further price hikes for consumers and squeezing profit margins for local companies.

Outlook and Policy Responses

In response to these challenges, some economic experts suggest that the Nigerian government and the CBN should consider long-term solutions to improve FX liquidity. For example, initiatives to boost non-oil exports, increase local production, and stabilize the exchange rate could help mitigate ongoing pressures. Nevertheless, without substantive reforms, the naira may continue to face instability, and further declines could compound inflation, putting additional pressure on consumers and businesses alike.

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