Here's why the naira continues to weaken

The inflation rate in Nigeria currently stands at 20.77%, a 17-year high and an all-time high since 2005. The weakening economy and the global oil crises are the main causes of this spike. To combat the escalating cost of products and services, the CBN responded by increasing the benchmark interest rate to 15.5% for the third time in a row, according to reports.

The steady decline in the Naira's value in the markets has increased investors' level of uncertainty as it has become increasingly challenging to ascertain the actual exchange rate against other currencies, especially the US dollar.

Since July 2021, when the central bank stopped selling foreign currency to Bureau De Change businesses operating in the nation, the black market exchange rate has been unstable and inconsistently priced. At the time, the bank attributed the prohibition to the alleged speculative practices of the BDC owners, a decision that drastically decreased the volume of FX investors can buy in the black market.

The Nigerian black market for currency exchange encourages volatility across exchange rates, which mostly creates trading advantages for some traders. This in turn creates a ripple market across the Nigerian economy, affecting all sectors.

Naira is presently selling as high as N760/$1 depending on the region and seller, down from an average of N565/$1 reported as of December 31, 2021.

 The CBN's official naira exchange rate has significantly declined against the US dollar so far this year. On Friday, it closed at N441.67/$1, down from an average of N416/$1 seen the year before.

This is a function of the shortage of FX supply, which has prevented the CBN from intervening in the markets due to factors such as declining inflows, a dearth of remittances from major players like the NNPC.

Despite an increase in interest rates by the Central Bank of Nigeria, the ongoing FX shortage in the nation has caused the naira to lose strength versus the US dollar. Increased demand also results from people trying to protect their savings from the growing inflation rate by investing in foreign currencies.

The country's foreign exchange reserves have also decreased by around $2.8 billion since January as a result of the Central Bank's ongoing interventions in the Investors and Exporters window. The reserve level was $37.68 billion as of Thursday, October 20, 2022, dropping further below the $40 billion, according to Nairametrics.

Why is the Naira depreciating?

The demand for Nigeria's exports is one of the most prominent factors for the depreciation of the naira. Nigeria's export industry has been a notable aspect since the 1960s, which has resulted in the predominance of a sole export commodity—oil. With its growing manufacturing sector, Nigeria was once thought to have an export-driven economy. According to experts, the nation has experienced a negative balance of payments for ten quarters in a row, dating back to the first quarter of 2019. This indicates a current account deficit, which has caused the currency to depreciate. The governor of the Central Bank of Nigeria, Godwin Emefiele, explained why the Naira was devalued.

The decline in crude oil revenues and the withdrawal of foreign portfolio investors, he said, had a substantial impact on the flow of foreign currency into the nation because the Nigerian market is dependent on oil exports.

The CBN asserts that it is dedicated to gradually liberalizing the forex market in order to smooth out exchange rate volatility and address the impact of swift fluctuations in the exchange rate on macro-economic variables as a result of the nature of the lower dollar profits.