Beyond Politics: Unpacking Nigeria’s Forex Dynamics

'Tosin Adeoti
7 min readApr 17, 2024

There are two categories of people I see on this forex issue:

1. Those who think there is nothing that the Bola Tinubu led government is doing that can be good. They go to town saying stuff like all the gains the Naira has made is a mirage that would unravel sooner than we expect. They made no allowance for nuance and the implementation of reforms they have long advocated for, including the convergence of the official and parallel market. To them, Cardoso is a stooge of Tinubu who cannot do anything right. They are on AriseTV telling us all the reasons nothing will work.

2. The second group are eternal optimists as long as APC is in power. Despite supporting and hailing the past APC administration that plunged the entire country into an economic crisis, they have unthinkingly continued the same for this current APC administration, which, instructively, has come out to strongly condemn the economic performance of their predecessor. With the naira gaining, their voices are the loudest. “Sell your dollars,” is their rally cry. “It is going to N600.”

But like I wrote in my article, “Will Cardoso Stand His Ground?”, I believe there is a lot to miss if we only view the current situation through political lens.

We all know that at the beginning of the year, the naira went down to about N1,900 to a dollar. As alluded to by Bloomberg, many speculators had expected the value of the naira to continue its free fall. However, the Naira has been gaining strength lately and has gone up to about N1,100 to a dollar. And while many are asking why this has not reflected in the prices of goods and services, it is the norm that there will be a lag in the downward trend of prices. If the appreciation of the naira continues or even remains as it is, the effect will be seen in 3–6 months in the prices of everyday goods.

But don’t hold your breath at massive price cuts. The Nigerian system has built into itself many inefficiencies such as cartels and oligarchies such that if prices have gone up 350% in the last 12 months, you should only expect around a modest 50% price reduction in the next 12 months if things continue the way it has. The system is geared towards stifling the proper functioning of the markets. The popular refrain among the elites is “How we go chop if the market works?” But not to worry, just as supporters of the ruling party are rolling out the drums over a N1100 dollar value, even though they met it at N400, you can expect them to milk the situation when the price of a wrap of fufu which is now at N250 becomes N200 even though they met it at N100. Such is the bllindness of partisanship.

But, no matter where your politics lean towards, let’s agree on something:

* The naira has gained significantly.

This gain has been through some long due reforms such as the unification of the foreign exchange market, removal of all limits on margins for IMTO remittances, introduction of a two-way hold system, transparency in the BDC segment of the market, etc. All these have been suggested by international bodies and economic experts for a very long time as reforms desperately needed. So, going through with them signals to foreign investors that we are ready for business.

This has in turn turned on the taps:

* Foreign portfolio investments at $2.3b so far in February 2024

* Overseas remittances rose to $1.3b in February 2024

If these happened as far back as February, imagine what we have now. It’s all about demand and supply. If more supply comes into the country, the price will drop.

Bloomberg released an article yesterday about the dollar reserves plunging to $31.7 billion, which indicated a 5.6% decline in liquid reserves. This means that their calculation showed it at $33.6 billion to begin with. Yes, it is possible that they had used $2 billion to manipulate the market by pumping supply. But that raises the question of where the CBN got funds for the payment of the ‘valid’ backlog of pent-up dollar demand, especially for the airlines who sold their tickets in naira and needed dollars to take their funds away from the country. It makes sense to think a large part of the $2 billion was spent on that exercise. If that was done, then it may even be a surprise that the foreign reserves was only down by $2 billion. Perhaps the reserves was much more than that.

Some have mentioned the sales the CBN make to the BDCs. But how much could that be? Let’s say $10,000 is sold to the circa 1600 BDCs every two weeks since January. That comes to a total of $112 million. That’s insignificant in the market. While it is not an efficient way to deal with the market, which is why central banks across the global try to minimize this kind of intervention, the CBN may be doing this to signal to the market where the rates should go. By selling to the CBCs at a pre-determined price with clear instructions on how the dollars should be sold to retailers, the CBN is telling the other channels what it thinks the price of the dollar is. How long this will go on and how effective it will continue to be is left to be seen. As I said, central banks try to minimize the use of this instrument because it could backfire upon prolonged use.

It is no use even worrying about the reserves because with a reserve of $31.7 billion, Nigeria still has a sizable cushion of foreign-exchange reserves. The IMF has said that a gross reserve of around $32.6 billion will cover about six months’ worth of imports.

The conflict in the Middles East has ensured the high price of oil. The reforms is sure to provide inflows through multi-lateral loans. Inflows are expected from Afreximbank and the World Bank. Foreign remittances are expected to continue to improve, and with the crackdown on Binance, that unofficial channel through which forex flows may have been blocked.

It is also wise not to forget the news coming from the finance ministry. It is attempting some financial engineering of its own. It plans to begin the issuance of domestic foreign currency-denominated bonds from this quarter. By offering domestic foreign currency-denominated bonds, the government aims to tap into the funds held by Nigerians at home and abroad who lack faith in the local currency and prefer to save in more stable currencies like the US dollar. This strategy could boost foreign exchange reserves and provide a source of funding for government projects and initiatives.

The question around this is, how Nigeria, which does not control the supply of any foreign currencies, intend to convince investors to invest in domestic foreign currency-denominated bonds outside of the usual stringent conditions of bond issuance. With the bitter experience of airlines around Nigeria honouring agreements, why should foreign investors trust that it will honour these new obligations when the time comes? A response may be that this is a new government and the writing on the wall suggests it is willing to forge a new path.

However, as I have said before in past articles, these are all shortcuts to solving problems that require longer, harder thought-out solutions. I would have preferred that the ministry focus on the fiscal hole it has dug itself instead of deepening it.

While it’s a welcome strategy to raise FX. The issue is how it intends to pay back. What is the strategy to earn forex? Oil sales will not cut it. Nigeria is not meeting its OPEC quota and while the current Israel-Palestine is helping the country, it will still not be sufficient.

If you take so much debt in foreign currencies, what happens if the Naira depreciates significantly against foreign currencies. The issuer is always at the mercy of the market. We wouldn’t have had to do this if Nigeria had taken non-oil exports seriously. And there is nothing on ground to show that we have started to do that.

What I see is that with no proper and realistic plan on the fiscal side, the Nigerian government will soon need another temporary FX financial engineering plan soon. How long will the government continue to do this to save face? As long as possible if what Tinubu did and his political sons are doing in Lagos is anything to go by. It will be a lot of motion without movement. They may just continue to kick the can down the road till the entire thing explodes or they hand over the fragile mess to a new self-appointed government.

Issuing foreign currency-denominated bonds carries risks, especially in a country like Nigeria, which has a history of currency volatility. If the Naira depreciates significantly against foreign currencies, the government’s debt burden could increase, potentially leading to financial instability.

By and large, as a political and economic commentator, I continue to observe. I have no interest in speculation. As an individual, I lean on historical precedence in global commerce and investment to know that time in the market is better than timing the market. Everything else is noise.