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Sunday, 03 December 2023 06:39

Why Nigeria’s Forex Crisis Persists

Nigeria’s foreign exchange volatility may linger for a while due to low crude oil production and limited foreign exchange inflows into the country, Daily Trust on Sunday reports.

The development is weighing heavily on the financial standing of Nigeria and its international reputation as a country that is ready for businesses despite the recent assurances by President Bola Ahmed Tinubu that all bottlenecks to investment had been removed.

“Africa has moved beyond the false past notions of business disincentivisation and poor adherence to the rule of law. We now fully recognise the nexus between the inflow of investor money and the sanctity of contracts,” Tinubu recently said during his visit to Germany.

But key to boosting investors’ confidence is the seamlessness in repatriation, which every investor doing business in Nigeria would be desirous of. In addition, foreign businesses would see a business environment with strong foreign exchange liquidity and one that guarantees not only a return on investment but predictability of returns.

As at last week, foreign businesses were said to have lost over N900 billion due to naira devaluation in 2023 alone.





Daily Trust on Sunday reports that Nigeria’s currency has suffered massive depreciation against the foreign currency. Exchanging officially at N800, it has recorded over 500 per cent depreciation in the last eight years. This was in addition to the debilitating inflation, which is now at 27  per cent.

At the heart of this is the liquidity challenge in the country’s forex market, which has seen the Central Bank of Nigeria (CBN) accumulating over $10 billion in forex forwards to commercial banks and businesses operating in Nigeria.

The effect has been much visible in the airline industry, earning Nigeria the notoriety of being the only country blocking the largest chunk of airlines’ $1.6bn blocked funds in Africa.

The International Air Transport Association (IATA) has been calling out Nigeria over the development, which is said to be responsible for the surge in airfares across international destinations as airlines had to adopt an anticipatory forex rate in pricing their tickets.

Beside the foreign airlines, local carriers are also baring the pangs of forex scarcity, leaving their aircraft stranded abroad while incurring huge demurrage on a daily basis.

Azman Air, for instance, has three of its aircraft stranded abroad. Manufacturers are unable to access foreign exchange to import raw materials. The president of the Pharmaceutical Society of Nigeria (PSN), Prof Cyril Osifo, told our correspondent that prices of drugs were on the increase because of the high forex price to import Active Pharmaceutical Ingredients (APIs).  He said it was high time Nigeria boosted domestic production.


 Why Nigeria’s crude export not translated into forex liquidity

An analyst, Babatunde Adeniji, said Nigeria’s Letters of Credit had become mere papers to foreigners as they no longer honoured them in doing business with Nigerian companies.


The National Security Adviser, Mallam Nuhu Ribadu, recently opened up that the Tinubu administration inherited a “bankrupt country” from his predecessor.

“We are facing very serious budgetary constraints. It is okay for me to tell you. It is fine for you to know. We have a very serious situation.

“We have inherited a very difficult country, a bankrupt country, to the extent that we are paying back what was taken. It is serious.

“But this administration is doing its best to meet our requirements, including that of the armed forces,” Ribadu said at the Chief of Defence Intelligence Annual Conference, hinting that the present administration is “paying back what was taken.”

Our correspondent reports that Nigeria’s public debt hit N87trn in the second quarter of 2023, up by 75 per cent from Q1 2023.

The Debt Management Office (DMO) said Nigeria’s total public debt rose to N87.38trillion in the second quarter (Q2) of 2023, recording an increase of 75.29 per cent. It was worsened by what experts call abuse of Ways and Means, which represents the loans taken directly from the CBN Act, and must not exceed five per cent of the previous revenue. But this was largely abused, prompting the Senate to quickly amend the act to increase it to 15 per cent.


For the 2024 budget, the federal government has proposed N26.01trn, with N8.25trn for debt servicing and other parameters as explained by the Minister of Budget and National Planning, Abubakar Bagudu.

“The assumptions include the oil price benchmark, which I said for 2024, we were assuming $73.96, oil production of 1.7 8million barrels a day at the exchange rate of $700.

“Then the inflation of 21 per cent and gross domestic product (GDP) growth rate of 3.76 per cent. The aggregate expenditure is estimated at N26.01trn for the 2024 budget, which includes statutory transfers of N1.3trn, non-debt recurrent expenditure of N10.26trn, debt service estimated at N8.25trn, as well as N7.78trn being provided for personnel and pension costs.

“Debt service increased because N22.7trn Ways and Means was securitized, meaning that it became a federal government debt at 9per cent.”

Analysts, however, said the parameters might not align with the current macroeconomic realities in the country.

Inflation has crossed 27 per cent; oil production is currently at about 1.3m barrels a day, lower than the OPEC Quota and the exchange rate, which is hovering around N800/$.

Crude swap, a serious trap

There are reports that Nigeria has entered into crude oil swap deals running into billions of dollars by previous governments.

Apart from the fact that Nigeria is not meeting the OPEC quota of 1.7m barrels per day, the ones being supplied currently are said to have been paid for in crude oil swap deals, which the Nigerian National Petroleum Company Limited (NNPCL) has promised to terminate.

But data from the Nigeria Extractive Industries Transparency Initiative (NEITI) indicated that the NNPCL exchanged crude oil valued at N2.6trn for refined petroleum products in 2021 under the Direct Sale Direct Purchase Agreement (DSDP).


The NNPC allocated a total of 98.92 million barrels of crude oil valued at $7.11bn (N2.73tn) for the local market in 2021. However, no crude was delivered to any of the local refineries in 2021.

“Instead, the NNPC used 95.25 per cent of this crude for crude exchange for products at the international market under the DSDP arrangement, while 4.75 per cent was sold at the international market.

“This may be due to the fact that none of the refineries were operational in 2021. The sum of N2.23tn ($5.85bn) was the actual domestic crude sales receipts in 2021, out of which the sum of N1.64tn ($4.30bn) represents 2021 sales receipts, while the sum of N588.68bn ($1.55bn) relates to settlement of prior year receivables,” the report stated.

The report also showed that the NNPCL lifted and exported a total of 24.84 million barrels of crude oil valued at $1.70bn on behalf of the federation in 2021.

It stated that the sum of $1.58bn was traced to the respective bank accounts as the actual sales receipt in 2021, of which the sum of $1.55bn represents 2021 sales receipts, while the sum of $24.32m relates to settlement of prior year receivables.

While experts said this was not new in the international crude oil market, they said Nigeria must be able to ramp up crude oil production to service the local refineries, which are expected to come on stream in a few weeks time like the Dangote Petrochemical Refinery, the Port Harcourt Refinery and other refineries, which the federal government has promised to revive, as well as the tens of modular refineries being licensed across the country.

An oil and gas expert, Jasper Nwachukwu, said the crude oil market was a future market, which means that supplies of months to come must have been bid for by the prospective buyers.

But he said Nigeria was facing a forex shortage despite being an oil-producing state because of mismanagement.

The expert said the NNPCL, which should have been the saviour for Nigeria in terms of relieving the country in its present forex liquidity crisis, was also not “liquid.”

Nwachukwu said, “Crude oil is a future market. Oil of the coming months has already been sold to refineries; that is why eventually, if they can’t make it they have to declare a force majeure, but besides that, in the Nigerian context, I think the problem is that we are spending too much money on debt servicing. We have borrowed so much money during the last administration and we are expending almost 90 per cent of our incomes to pay for debt servicing.

“Secondly, the NNPC is also not very liquid. They have to export cash calls from their JV partners. So these cash calls are coming from that same point, and most importantly of course is the issue of corruption, not knowing how much oil we are selling on a daily basis. You may know what you are producing but you don’t know how much is sold because part of it is stolen by oil thieves. Essentially, you can only guess and your guess work will turn out to be false.

“Then we are also not able to meet our OPEC quota. We are short of our OPEC quota by almost 300,000 barrels a day, so that is also a huge amount of money you are going to get.

“Until these characters in government find a way to spend less because they are also spending more than they are earning to maintain their lifestyle – buying SUVs of N150m, spending money to buy a yacht, and so on.

“We are not earning the amount of money we should be earning from our oil, whatever we earn is used on servicing debts, and we are still borrowing more.”

‘Govt running on life support’

The expert said the implication of not making enough money from the sale of crude oil is that the government cannot meet its obligations to the citizens.

“At the end of the day, we will have a government that is not well conversant with what it’s supposed to do. The government is running on life support, like it is in an intensive care unit.

“You want to be throwing money at every opportunity, even the ones that don’t need money,” he added.

On the solution, he said, “I can’t tell you what I think is the solution because I don’t know it myself. I don’t see forex coming down soon because it is a business for some highly placed government guys. They jack up their prices for the common man and they want it to go on.

“There are refineries in Europe that need this oil; and you know refineries cannot shut down, so they are waiting for crude oil, and they are on 24/7. So it (advance crude oil sale) is an international way of doing business and not peculiar to only Nigeria. The little money we get is used to service debt and not to boost production.”

Dr Garuba Dauda, another oil and gas analyst and expert, said, “I am of the view that we need to do serious thinking on the forex liquidity thing. Why Nigeria’s situation seems to have defied solution is that we are facing artificial scarcity caused by hoarding. Privileged people are buying up dollars in circulation to secure themselves in the face of an increasing fall in the value of the naira. This practice is putting pressure on forex demand, thus compounding the situation.


“Nigeria needs to address this issue by adopting the approach of Singapore. The approach is buying up the dollars that pass through the CBN, while denying speculators access to information about the country’s foreign/forex reserves,” he said.

A chartered accountant and financial risk expert, Olabode Afolayan, said to optimise the forex earnings, citizens must cut their appetite for foreign made goods and also de-dollarise the economy.

He said importation was putting so much pressure on the naira, adding that there should be a change of mindset by Nigerians.

“We need to have a change of mindset and be more patriotic. We need to buy more homemade items than importation. Although people are not buying Nigerian made things due to quality, we need to do what the Chinese did by going local.

“We need to start producing our own televisions, our engineering students in the universities should be able to build local technology for this, we need to start manufacturing en masse,” he advised.

He also urged the government to clamp down on Nigerians hoarding the dollars as they are very powerful. The government is doing more to maintain momentum against the dollar.

“We need not sabotage the effort of the government; and the government should talk to those hoarding the dollar because they are the big boys of Nigeria and not ordinary Nigerians.

“When they hoard, the government should clamp down on them because the government is doing everything to make naira appreciate by clearing the forex backlogs and clearing trapped funds of foreign airlines. I learnt the government cleared some of this outstanding issue; hence the naira appreciated,” he added.

Forex liquidity rising – CBN

The governor of the Central Bank of Nigeria, Olayemi Cardoso, speaking in Lagos on recently during the 58th annual Bankers Dinner, said there was an improvement in the forex market liquidity.

He said, “We have already witnessed improvements in FX market liquidity in recent weeks as the market responded positively to tranche payments, which have been made to 31 banks to clear the backlog of FX forward obligations.

“We have been subjecting these payments to detailed verification to ensure that only valid transactions are honoured. In a properly functioning market, it is reasonable to expect significant FX liquidity, with daily trade potentially exceeding $1.0bn.




“We envision that with discipline and focused commitment, foreign exchange reserves can be rebuilt to comparable levels with similar economies.”


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