Nigeria’s Naira: From ECOWAS’ Lead Currency to Trash?

Once upon a time, Nigeria’s national currency, the Naira, was the most sought-after medium of exchange and store of value within the Economic Community of West African States (ECOWAS); it was almost a fully convertible currency within the sub-region. Indeed, at the commencement of deliberations on common currency for the sub-region, the choice of the Nigerian Naira was almost unanimous, but for the vestiges of the Anglophone-Francophone divide within the bloc. By the inception of ECOWAS almost five decades ago (in 1975), the Naira was much higher in value than the British pound sterling and the American dollar.

Then, Naira was accepted on the west coast up to Ivory Coast and Senegal. Traders freely spent Naira in many countries of West Africa. Nigerian sports journalists who covered sporting events in Benin Republic, Togo, Ghana, Senegal and Ivory Coast freely spent Naira in the markets of these countries. Naira was stronger than French Franc (CFA) then. Those days are gone; the naira is now being rejected in these countries.

Following the depreciation of Nigeria’s Naira in the past few months, further setbacks have hit the West African region’s favoured (local) currency as trans-border traders have also started rejecting it. Findings across the Seme-Nigeria border by a national newspaper show that the traders on both sides are now preferring either the CFA (French franc) or the domestic currency of the non-francophone countries.

The findings show that the Naira began sliding from that status (of wide acceptance) in February, hitting the point of outright rejection in March 2024. For traders on both sides of Nigeria’s borders, holding Naira “has become a huge risk as the value keeps depreciating since last year with the worst rate of depreciation recorded last month.” Official reports indicate that Naira which traded above N1/1.5CFA in the first quarter of 2023 dropped sharply to N1/0.9CFA in the second quarter and N1/0.8CFA in the third quarter 2023.

After a moderate stability through the fourth quarter 2023, it opened 2024 at N1/ 0.66067CFA in January 2024. However, following a second wave of depreciation in February, the Naira’s strength went down drastically to N1/0.38308CFA before hitting a new low of N1/0.37595CFA in the last days of March. The (cross-border) traders are already hedging against further depreciation, although there’s a slight improvement in the past few days.

However, the Naira is still not close to what it used to be in the sub-region some years ago. The development is adversely affecting the cost of goods imported into Nigeria through its neighbouring West African countries. Consequently, the traders are recording a lull in business activities on both sides of the border towns in Nigeria, Benin Republic and others. Indeed, in most border markets in Benin-Nigeria, many of the money changers or Bureau De Change, do not display the Nigerian currency (anymore) like they used to do.

And truly, last year (2023), Nigeria’s naira ranked third among the world’s worst performing currencies, according to a Bloomberg’s report. Of the 151 currencies tracked by Bloomberg, naira was the world’s worst performer after the Lebanese pound and the Argentine peso, after closing at N1,043/US$1 on Thursday — about 72 hours to the end of 2023.

The naira eventually closed the year at N907.11/US$1 the next day, Friday (data published on the website of the FMDQ showed). However, according to data sourced from the black market, the Naira closed at N1,193/US dollar at the unofficial window on Friday, the last business day of the year.

The naira’s performance in 2023 has been described as its worst since the return to democracy in 1999. Foreign reserves in Africa’s biggest crude producer are at the lowest in six years with so much of them encumbered by overdue short-term overseas obligations, Bloomberg noted in its report. Vetiva Capital Management Ltd on its part predicts that the naira may slip further unless President Bola Tinubu’s government successfully lures international investors or ramps up oil output/sales.

“A significant rise in external reserves, material increase in foreign exchange inflows, and reduction in money supply” will be positive for the naira, Vetiva Capital said in a note to clients. Unfortunately, rather than increase, Nigeria’s external reserves is fast depleting. “Nigeria’s FX reserves dips by US$1.02 billion in 18 days on CBN’s naira defence,”—a headline in one of Nigeria’s national newspapers on April 8, says it all.

According to the report, Nigeria’s FX reserves stood at US$33.43 billion, down from US$34.45 billion on March 18, 2024, according to the latest data from the CBN. The downward trend reflects a significant drawdown on the reserves, which have been depleting since March 18, when it peaked at US$34.45 billion. The reserves dropped to US$34.39 billion on March 19 and has continued to drop steadily, hitting US$33.57 billion by April 4.

All these show that the apex bank has been consistently intervening in the FX market, contrary to its announced policy of free interplay of market forces in the determination of the Naira exchange rate. Although these interventions by the CBN have ‘improved liquidity’ in the FX market, they have apparently reflected in the fast-depleting FX reserves. No wonder, within the 18-day period alluded to above, the CBN announced the complete clearance of the valid foreign exchange backlog and sale of US$10,000 FX to each bureau de change (BDC) in Nigeria at a rate of N1251/US$1

However, it is no good omen for the apex bank to resort to the depletion of the nation’s FX reserves for the improvement of liquidity in the foreign exchange market. A fast declining FX reserves for any country is economically ruinous and counterproductive in the mid- to long-term. This is why the CBN must expeditiously put measures in place not only to encourage massive non-oil exports but also to ensure their proceeds are seamlessly repatriated.

From all indications, the subsisting environment does not encourage FX repatriation: extant policies and restrictions seem to constitute bottlenecks even to genuine exporters. It is cheap and escapist for the CBN to fall back solely on the nation’s FX reserves in trying to strengthen the Naira. This is by no means sustainable. In the true spirit of economy diversification, the apex bank must expeditiously come up with an overarching initiative to beef up proceeds from the non-oil export sector.

This line of action is compelling, because the crashing of the Naira (by poor FX supply) has much wider implication for not only Nigeria but also for the entire ECOWAS sub-region. At present, statistics show that the Naira (once the leading currency) has weakened against all currencies within ECOWAS and beyond. Whether it is the CFA (used by francophone countries) or the Ghana Cedi, or the Gambia Dalasi or the South African Rand—the Naira has lost heavily in recent times. The Nigerian money neither serves as a durable store of value nor a valuable means of exchange.

It therefore goes without saying that the collapse of the Naira (especially within ECOWAS) is tantamount to a threat to Nigeria’s very high pedestal position in the economic bloc. This is more so, now that the country occupies the apex leadership position of the body; the cap presently won by President Bola Ahmed Tinubu as chairman of ECOWAS. The efforts of the apex bank to prop the Naira is therefore imperative; it only needs more transparency, to attract the confidence of stakeholders. This also implies openly recanting its reliance on ‘market forces’ in the FX market management. All secrecy should be done away with!

• The author, Okeke, a practising Economist, Business Strategist, Sustainability expert and ex-Chief Economist of Zenith Bank Plc, lives in Lekki, Lagos. He can be reached via: [email protected]