— 2mins read
NIGERIA’S Finance Minister Zainab Ahmed has said that naira is responding to market forces against the popular perception that it has been devalued.
The minister, who spoke on President Buhari’s six years in office in a monitored television broadcast, noted that weak response of Nigeria’s naira to the United State’s dollar was largely attributed to volatility in the oil price which contributed largely to Nigeria’s reserves.
“Let me not use the word ‘devaluation.’ Naira is responding to market forces of demand and supply. We have oil and gas, unfortunately, still the major source of foreign exchange,” she said, noting however that efforts were being made to expand other sources of revenue to strengthen the naira.
“Right now, we are working at developing alternatives to earning foreign exchange from the mineral sector and supporting businesses that are exporting finished products which means more foreign exchange coming into the country.”
Oil contributes less than 15 per cent to the Gross Domestic Product (GDP), but is responsible for at least 70-85 per cent of revenue and 80-90 per cent of foreign exchange in Africa’s biggest oil producer.
Naira has officially weakened from N306 in 2020 to over N400 in 2021 after oil price volatilities in the COVID-19 market. Dollar exchanged at N592 at the parallel market on June 11.
As a monocultural market, the Nigerian economy has largely been a price taker in the global foreign exchange market due to its inability to earn big from export of finished products.
Zainab stressed that the volatility characterising the oil price at the international market affected Nigeria’s foreign exchange, and the value of the currency.
“This development affects the level of our reserves and affects other key aspects of the economy.”
She further said that the Federal Ministry of Finance and the Central Bank of Nigeria had made a commitment to converge towards a single exchange rate.
“The governor of the central bank and I have made a commitment while we processed the IMF loan of $3.4 billion that we are going to converge towards a single exchange rate. If you remember in the year 2020, we did the initial exchange 2020 budget at 305naira to the US dollar.
“When Covid-19 happened and we are processing all these finances, an adjustment was made for the official exchange rate to be N360. The further requirement was that the monetisation for the foreign exchange, even for the government, is done at the market rate, not the black market rate – NAFEX rate. That is what is happening now. So, when the government earns its money whether from FAAC or from any other sources, it is monetised at the NAFEX rate.”
She explained that the country had now converged to a single exchange rate which would help put the economy on a growth path, gaining investor confidence.
“In a way, we could say we have converged because we are now doing everything at the NAFEX rate. The other rate is the unofficial rate and unorthodox market. That market will improve when the inflow in foreign exchange improves.”
The government is eyeing to converge at the NAFEX rate – the poll rate based on the contributions of 10 banks- to create stability in the market. But this has been difficult due to factors ranging from demand to supply inefficiencies.
Analysts do not agree with the minister as even the CBN Governor Godwin Emefiele, in May 2021, replaced an earlier N379/$ rate with N410/$, admitting that it was no longer feasible and the bank was running a managed-float system.
Investopedia defines devaluation as a “deliberate downward adjustment of the value of a country’s money relative to another currency, group of currencies, or currency standard.” The CBN has deliberately moved official FX rates from N305/$ to N315/$, and to N379/$ to 410/$ in less than two years. This means devaluation.
The minister attributed rising inflation to the exchange rate, with other factors such as transport costs linked to increasing PMS price and an inadequate number of mass transit vehicles and trucks for food and other forms of transportation, noting the government was working on a lasting solution to the concerns.