Nigeria Naira (NGN USD): Citizens hoard foreign currencies to protect wealth

Nigerians have amassed foreign currencies to protect their wealth from the volatility of the naira and rising inflation. This comes from a research report in a journal published by the Central Bank of Nigeria.

“Higher real exchange rate volatility is associated with increased currency substitution,” said central bank economists such as Isaiah Ajibola, Sylvanus Udoette, Rabia Muhammad and John Anigwe in the paper available on the central bank’s website. It is necessary to “contain exchange rate volatility and inflation in order to curb the pace of currency substitution in the country,” they said.

One measure of currency substitution, the ratio of foreign cash deposits to naira deposits when needed at banks, exceeded the International Monetary Fund’s 30% threshold from 2009 after the global financial crisis, the researchers said. It peaked at 98.2% in 2014 before falling to 83% in 2018. A broader measure of foreign currencies at banks in terms of naira savings, demand and time deposits remained largely within the IMF limit in the study period from 1995 to 2018.

Africa’s largest economy devalued the local unit twice last year after a coronavirus pandemic-sparked oil price drop hurt revenues. While crude oil accounts for less than 10% of the country’s gross domestic product, it accounts for almost all foreign exchange revenues and half of the state revenues of the continent’s largest commodity producer.

The naira has lost 66% of its value since 2009 when it was exchanged for the dollar at 149 naira. The unit was barely changed on Thursday at 4:02 p.m. in Lagos on the spot market at 409.21 naira per dollar. Inflation in Nigeria accelerated to its highest level in four years in March and is now more than double the 9% limit of the central bank’s target range.

The central bank had previously warned traders to stop offering local goods in foreign currency and banned access to the foreign exchange market for domestic transactions.

“The main policy implication of currency substitution is that it reduces the effectiveness of monetary policy,” the researchers said. “Efforts to further diversify the economy should be of paramount interest to strengthen the foreign exchange income base.”

((Updates the naira exchange rates in the fifth paragraph)

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