Navigating An Unstable FX Environment

If I had a dollar for every time I heard somebody lament about the weakness of the naira within the past 4 years, I might be tussling with some Forbes billionaires right now. Earlier in the month, while scrolling through my social media feed, I came across a joke, saying “Na wa for this naira o, always losing like Arsenal”. While Nigerians have developed clever ways to find humor in the face of economic hardship and socio – cultural impracticalities, it is even more important to be adequately informed about their root causes and ways to navigate through such murky waters.

The memories of the last devaluation of four years ago are still ever present in the minds of Nigerians and foreign parties of interest. So, how did we find ourselves in this entanglement once again?


First, a little context. Simple economics teaches us that for one to spend dollars, one must earn dollars. Traditionally, Nigeria earns over 90% of its dollars from petrochemical exports. While the country has historically been a net exporter of goods and services, it operates a fixed exchange rate regime (Naira closely pegged to the US dollar). The big problem here is the large differential in inflation rates between both countries. US inflation currently sits at 1% year – on – year (y/y), while Nigeria sports a hefty 12.82% y/y. To make up for the implied weakening, Nigeria sets its interest rates at relatively attractive levels to lure foreign investors’ dollars into the country.

Facing Harsh Realities

The onset of the coronavirus and its devastating effects on a global scale led to a plunge in oil price by over 80%, and a sharp reversal in foreign portfolio investment inflows. Like 2015/2016, it felt like déjà vu for many Nigerians, as the Naira began to slide against the USD. Since the start of the year, the naira has lost against the USD by 25% and 22% in the official and parallel windows respectively. Some would argue that even worse than the devaluation of the naira is the FX illiquidity they are currently battling with. Importers and investors alike have been struggling to get their hands on scarce dollars and the restrictions have been never ending. From an outright halt in CBN’s FX sales to BDCs for months, to commercial banks driving down their monthly dollar limits as low as US$100 per month, the dollar crunch is really hitting home for most. Putting into context the upward trajectory of inflation, food insecurity worsening and the more recent rise in fuel and energy prices, the already weak purses of locals are set to be stretched considerably this year. Taking a cue from the apex bank’s body language, we expect the bank to defend the local currency by gradually freeing up dollar supply and sourcing for concessionary loans.

An Advice or Two

It is quite clear that without significant structural changes, the naira would always have to be devalued. There remains the urgent need for import substitution strategies to be put in place and a diversification of FX revenues to shield against shocks in the crude market.

In the face of a difficult number of years for Nigerians, we encourage portfolio diversification with the inclusion of dollar denominated assets to the pool. This is especially important for investors with foreign currency obligations. Incorporating such an investing strategy should help mitigate the effects of a forthcoming devaluation.

Some dollar denominated assets that could be explored include dollars (cash itself), dollar fixed deposits, Eurobonds, foreign equities and dollar mutual funds such as Investment One’s Vantage Dollar Fund. The Vantage Dollar Fund provides retail investors with attractive rates of return while also providing a decent entry point (minimum US$500).

Also, we encourage weaning dependence on foreign products and sourcing for locally produced alternatives whenever available. This could help in evading higher costs related to currency depreciation.