Can the Central Bank of Nigeria win the fight to stabilise the naira?

The naira’s precipitous decline raises critical questions about the Central Bank of Nigeria’s (CBN) capacity to stabilise the currency. Despite a series of interventions, including interest rate hikes and a floating exchange rate regime, the naira continues to lose value, further intensifying inflationary pressures and exacerbating the economic hardship faced by Nigerians. As prices of essential goods soar, the central question emerges: Is the CBN still in control, or is the Naira’s trajectory beyond its reach?

The naira’s weakness reverberates across the economy, particularly in a country heavily dependent on imports. Nigeria imports roughly 69 percent of its goods, including basic necessities such as food and fuel. As the local currency depreciates, the costs of these imports surge, deepening the cost-of-living crisis. For businesses, particularly those in manufacturing and construction, the weakening Naira has escalated input costs, threatening operational viability and leading to the closure of some enterprises.

“For businesses, particularly those in manufacturing and construction, the weakening Naira has escalated input costs, threatening operational viability and leading to the closure of some enterprises.”

Small and medium-sized enterprises (SMEs) are particularly vulnerable. With the rising cost of borrowing, as interest rates hit 32 percent, and tighter lending conditions from banks, many businesses are struggling to access the capital necessary for expansion or even survival. This credit squeeze also extends to the agricultural sector, which relies on imported fertilisers and equipment, posing a direct threat to Nigeria’s food security.

Read also: Why CBN is losing battle to stabilise naira 

Perplexingly, the naira’s decline persists despite a reported increase in Nigeria’s foreign reserves, which stood at $37.05 billion as of July 2024. In theory, higher reserves should bolster confidence in the currency and provide a buffer against market volatility. However, the scarcity of foreign currency in the domestic market, coupled with soaring demand, has driven more Nigerians and businesses towards the parallel market, where exchange rates are significantly less favourable. This divergence between official rates and black-market rates has become fertile ground for speculation, further undermining the naira’s stability.

Nigeria’s structural reliance on imports is at the heart of its currency’s instability. The country’s failure to develop a diversified industrial base has left it exposed to external shocks, while currency depreciation amplifies the price of imported goods. As the economy becomes more strained, it is evident that monetary policy alone—no matter how stringent—cannot address the underlying vulnerabilities.

In an attempt to address these issues, the CBN introduced a floating exchange rate regime in 2023, with the goal of unifying Nigeria’s multiple exchange rates and reflecting the true market value of the naira. However, this strategy has backfired, leading to more market confusion and, arguably, intensifying speculative behaviour. The widening gap between the official exchange rate and that of the parallel market has raised concerns over the CBN’s ability to establish credibility in its currency management efforts.

The CBN’s reliance on aggressive monetary tightening as a tool to control inflation is also under scrutiny. While the recent hike in the benchmark interest rate to 27.25 percent aims to curb inflation by reducing consumer demand, it has resulted in higher borrowing costs, making it harder for SMEs and other sectors to access credit. In an economy where import dependency is ingrained, higher interest rates do little to tackle the root cause of inflation—imported goods becoming more expensive due to the weakening Naira.

Ultimately, a more comprehensive and collaborative approach is required. The CBN’s actions need to be complemented by broader economic reforms that address Nigeria’s structural challenges. Fiscal authorities must play a critical role in driving policy measures that boost local production, reduce import dependency, and diversify the country’s foreign exchange sources. Reforms targeting key sectors, such as agriculture, technology, and manufacturing, could pave the way for increased job creation and reduce the strain on the Naira by curbing demand for foreign currency.

The fight to stabilise the naira is far from over, and the CBN’s current strategy appears inadequate. Unless the underlying causes of Nigeria’s economic imbalances are tackled, the naira is likely to remain under pressure, despite the central bank’s best efforts. A recalibration of policy, with a focus on structural reforms and rebuilding market confidence, is necessary if Nigeria is to avoid deeper economic distress.