Drivers of Nigeria’s currency depreciation

Nigeria's currency, the Naira, has been experiencing rapid depreciation, causing concern among investors and policymakers. Analysts at the Financial Derivatives Company have attributed this depreciation to various factors such as the upcoming general elections, reduced oil receipts, currency speculation, and continuous pressure on foreign reserves. Seyi Omidjara, an Analyst at FDC, shed light on the implications of these factors on the economy in a recent interview with CNBC Africa. One of the key drivers behind the depreciation of the Naira is the election cycle. Omidjara pointed out that similar trends have been observed in countries like Kenya, which also experienced currency depreciation ahead of their upcoming election. The uncertainty surrounding the election results and potential policy changes causes investors to withdraw their funds, leading to a decrease in the value of the currency. Additionally, heightened political activities result in more dollars changing hands in the market, further impacting the exchange rate. Furthermore, currency speculation plays a significant role in the depreciation of the Naira. Omidjara highlighted that the lack of clarity regarding the future government policies leads to increased speculation among investors. The Central Bank of Nigeria's limited sale of Foreign Portfolio Investments (FPIs) in recent months has driven many investors to resort to the parallel market for foreign exchange, exacerbating the pressure on the Naira. In terms of policy responses, Omidjara emphasized the importance of adopting a coherent monetary policy framework. She explained that the current approach of trying to control all aspects of monetary policy simultaneously is unsustainable and contributes to the currency depreciation. Omidjara suggested that prioritizing exchange rate flexibility over capital controls could potentially alleviate some of the pressure on the Naira. Looking ahead, Omidjara acknowledged that a reversal in the Naira's depreciation is anticipated once the uncertainty surrounding the election cycle diminishes. With market-friendly political candidates vying for office, there is hope for a more stable economic environment post-election. However, Omidjara cautioned that significant reforms may be necessary to address the structural issues contributing to the currency devaluation. In conclusion, the depreciation of Nigeria's currency is a multifaceted issue influenced by political, economic, and speculative factors. While the upcoming elections and currency speculation are immediate concerns, implementing appropriate monetary policies and structural reforms will be crucial in stabilizing the Naira and promoting economic resilience in the long term.