Some financial institutions and Nigerian companies that took offshore loans when the exchange rate was about N320 to a dollar are facing difficult times as pressure on naira forces the exchange rate to N530 to a dollar.
It should be remembered that barely a year ago, Diageo Plc’s Nigeria unit said it’s struggling to refinance a foreign-currency loan and trim costs following a shortage of dollars in Nigeria.
Commenting on possible options for the financial institutions and firms, the founder and Chief Executive Officer (CEO) of Global Analytics Consulting Limited, Tope Fasua said the affected companies have no option than to face their risk.
According to him, “Exchange risk is always present anytime you borrow in foreign currency. If naira gained, say N200 to the dollar, it will also be their gain. So these companies have no choices but to fulfil their obligations.”
The U.S. dollar shortage is biting hard in Nigeria with its pangs being felt across all sectors of the economy.
Analysts are concerned that developments in the oil sector are not helping to solve the problem of dollar shortage.
For instance, Crude oil output fell to 1.43 million barrels per day (bpd) last month, way below its OPEC quota of ~1.6m bpd and the lowest since mid-2016, according to data compiled by Bloomberg.
The naira plunged to a fresh record low against the dollar, the British pound sterling and euro on Thursday and Friday amid the lingering scarcity of foreign exchange in Nigeria.
The value of the naira fell against the US dollar, both at the parallel market and the Investors’ and Exporters’ foreign exchange window.
The local currency, which stood at 526/$1 on Tuesday, fell to 530/$1 at the parallel market on Thursday and Friday from 528/$1 on Wednesday.
The naira dipped to N720 against the pound at the parallel market from 717/£1 on Wednesday, while the euro rose to N620 from N616 on Wednesday.
At the I&E window, the naira weakened further to 411.67/$1 on Thursday from 411.50/$1 on Wednesday, according to FMDQ Group.
No less than 55 per cent to 60 per cent of Nigerian forex transactions are traded at this window, which is used by the CBN and most exporters and investors, according to Financial Derivatives Company Limited.
“It serves as not only a source of price discovery but also a barometer for measuring potential and actual CBN intervention in the market.
Although the value of annual dollar remittances by Nigerians working abroad has surged to $34 billion, a figure that easily surpasses the previous record-high of $25 billion, a large portion of the funds doesn’t seem to be entering domestic forex markets.
The increase, which has been attributed to the Central Bank of Nigeria (CBN)’s “naira for dollar” incentive scheme, once again highlights the growing importance of diaspora remittances to Africa’s most populated country.
As Biodun Adedipe, an economist with Adedipe Associates explained that the CBN’s incentive scheme may well be the reason why the target of $34 billion in annual diaspora remittances was reached two years ahead of schedule.
However, despite this surge in remittance inflows, Nigeria continues to grapple with shortages of foreign exchange. Such forex shortages, in turn, contribute to the naira’s continued depreciation as well as the resultant rise in inflation.
In attempting to explain why Nigeria is not fully benefiting from the rising remittances, Adedipe points to the fact that a lot of the dollars sent do not find their way to the foreign exchange market in Nigeria.
His words: “For example, someone wants to send money to his or her family here in Nigeria, this person, let’s say has $10,000 in the US, and wants to give the naira equivalent to his family member here in Nigeria.”
Ordinarily, the way it works in other countries is that $10,000 will come into the forex market within Nigeria, and become a boost to supply here.
However, this is not happening because “the reality is that in Nigeria’s situation, the dollar doesn’t leave where it is,” Adedipe explained.
“The person that provides the naira equivalent here would rather keep the dollar equivalent outside there, so it doesn’t come into the FX market in Nigeria.”
According to Adedipe, Nigerian authorities now need to find ways that “make it more attractive for those foreign currencies generated by migrant Nigerian workers to be remitted home.”
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