Naira Falls To A Historic Low As Dollar Liquidity Shrinks By 72%

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Dollar and Naira

The Nigerian naira has experienced a steep decline, hitting its lowest value in two weeks, due to the limited availability of US dollars in the foreign exchange market. 

One US dollar trades at N1,670.65, after the naira depreciated by 4.3% – the most significant one-day drop since October 15. This decline reflects a 72% decrease in available dollars for exchange, with only $81 million circulating in the market, marking the lowest level in almost a month.

This dollar shortage is due to Nigeria’s recent focus on increasing its foreign reserves, which reached $39.4 billion on October 24, the highest in nearly two years. While this increase in reserves signifies a proactive approach to economic stability, it has also intensified the dollar scarcity in the domestic market, putting immense pressure on the naira’s value. Businesses reliant on dollar exchange for imports and foreign transactions face increased operational costs as the local currency struggles to maintain its purchasing power.

The naira’s volatility traces back to June of last year when the government implemented a policy allowing the currency to float against the dollar freely. This move, meant to stabilize the economy by aligning currency values with market realities, has since led to a near 70% naira depreciation. 

As a result, the Nigerian currency now ranks among the world’s worst-performing in 2024, surpassed in devaluation only by the Ethiopian Birr and the Lebanese Pound. The naira’s weakening reflects deeper issues in Nigeria’s oil-dependent economy, as lower foreign exchange inflows from oil sales compound currency instability.

Nigeria’s dollar shortage and currency devaluation highlight a complex challenge for the government, which must balance building reserves and stabilizing the naira to protect the economy from further depreciation. 

The impact of this situation is felt especially by import-dependent industries and businesses, where rising costs of goods and services are inevitable due to the increased difficulty of obtaining dollars.

Stabilizing the naira may require a re-examination of fiscal policies and potential structural reforms to reduce reliance on foreign currency reserves, bolster local industries, and ultimately improve the resilience of Nigeria’s economy in the face of global financial shifts.

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