Emmanuel OchayiNigeria’s naira has been on a precipitous decline, with the currency’s value plummeting against the dollar. As the Central Bank of Nigeria scrambles to stabilise the economy, a disturbing trend has emerged: the widespread hoarding of dollars by commercial banks and other financial institutions. This illicit practice has not only exacerbated the naira’s devaluation but also raised questions about the integrity of Nigeria’s currency management system.
Dollar Hoarding and Its Impact on the Naira
Join our WhatsApp ChannelCurrency hoarding, particularly of the U.S. dollar, has been identified as a significant factor contributing to the naira’s instability. When individuals and institutions accumulate foreign currency, it reduces the supply of dollars in the official market, leading to a depreciation of the naira. This practice not only undermines the CBN’s efforts to maintain currency stability but also fuels inflation and economic uncertainty.
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Aminu Gwadabe, President of the Association of Bureaux De Change Operators of Nigeria (ABCON), highlighted the challenges faced by BDC operators due to limited access to foreign exchange. He noted that the scarcity of dollars has led to currency substitution and speculative activities, further weakening the naira. Gwadabe emphasised the need for transparent mechanisms in the allocation of foreign exchange to ensure stability in the market.
CBN’s Measures to Curb Currency Hoarding
In response to the challenges posed by currency hoarding, the CBN has introduced several measures aimed at promoting transparency and stability in the foreign exchange market. One significant initiative is the automation of foreign currency trades, set to commence in December 2024. This move aims to replace the over-the-counter system with a more transparent platform, allowing real-time access to foreign exchange prices and reducing market distortions. The automation is expected to enhance liquidity and facilitate a market-driven exchange rate accessible to the public.
The CBN has issued stern warnings to Deposit Money Banks regarding cash hoarding and diversion. The apex bank emphasised that such actions would attract stiff penalties, underscoring its commitment to ensuring that financial institutions adhere to regulatory guidelines designed to maintain currency stability.
Expert Insights on the Naira Crisis
Financial experts have provided insights into the underlying causes of the naira’s depreciation and the broader economic implications. Ayodeji Ebo, an investment professional and managing director at Optimus by Afrinvest, pointed out that declining treasury bill yields have led to a reduction in foreign portfolio investment inflows. This decrease in foreign exchange inflows has, in turn, limited the availability of dollars in the market, contributing to the naira’s depreciation.
“Lower yields discourage Foreign Portfolio Investment (FPI), which means less foreign currency coming into Nigeria. When investors see lower returns, they look for better opportunities elsewhere. This decline in forex inflows adds pressure on the naira,” he stated.
Similarly, Ayokunle Olubunmi, an economist, noted that multiple factors, including declining yields, have played a role in the naira’s decline. He emphasised the importance of addressing these underlying issues to restore confidence in the currency and stabilise the economy.
The Role of Bureau De Change Operators
Bureau De Change operators play a crucial role in the foreign exchange market by providing access to foreign currency for individuals and businesses. However, challenges such as limited availability of forex, unfavourable offer rates, and fewer participating banks have hindered their operations. These constraints have fuelled speculative activities and further weakened the naira.
Gwadabe has called on the CBN to fine-tune its interventions in the retail forex market through BDCs. He also advocated for the approval of dollar cash imports by licensed operators and the establishment of transparent monitoring mechanisms for banks’ dollar sales to BDCs. These measures, he believes, would enhance liquidity and restore confidence in the foreign exchange market.
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The Broader Economic Implications
The instability of the naira has far-reaching implications for Nigeria’s economy. A weakened currency leads to increased import costs, contributing to higher inflation rates. This scenario erodes the purchasing power of consumers and can stifle economic growth. Moreover, currency instability can deter foreign investment, as investors seek stable environments to minimise risks.
The recent economic reforms, including the unification of official and parallel exchange rates and the reduction of petrol subsidies, aim to strengthen public finances and stabilise the naira. However, these measures require sustained commitment and effective implementation to yield the desired outcomes.
Emmanuel Ochayi is a journalist. He is a graduate of the University of Lagos, School of first choice and the nations pride. Emmanuel is keen on exploring writing angles in different areas, including Business, climate change, politics, Education, and others.
