—
On Friday, August 23rd, Jay Powell, who leads the US Federal Reserve, gave a much-awaited speech at the Jackson Hole symposium. He hinted that they might cut interest rates soon.
Jay Powell said, “It’s time to change our policy,” and mentioned, “We know where we need to go, but exactly when and how fast will depend on new information, predictions, and risks.”
This news made US treasuries go up, while the dollar dropped. This showed that investors thought lower interest rates were coming. Usually, lower interest rates make bonds more valuable and the dollar less attractive compared to other currencies.
For Nigeria, this might be good news. Nigeria’s exchange rate has been under a lot of pressure because of economic problems and new policies. Powell’s hint at a US rate cut might help.
The Central Bank of Nigeria (CBN) has been struggling to keep the Naira stable in a tough global and domestic market. A possible US rate cut could offer some relief.
Possible Relief for the Naira
One effect of a US rate cut is a weaker dollar. Lower interest rates in the US make the dollar less appealing to investors, leading to a drop in its value.
Nigeria has taken steps to keep the Naira stable, like unifying exchange rates. A weaker dollar could ease some of the pressure on the Naira.
The CBN decided to let the Naira float and match the official and parallel market rates. But since then, the Naira has dropped sharply, going down by 71% since mid-2023.
This drop has made things more expensive, raising inflation and the cost of living for many Nigerians. If the dollar weakens because of the Fed’s plans, the Naira might get stronger or at least stop falling so quickly, helping Nigeria’s struggling economy.
Lowering Inflation
Nigeria’s inflation rate has been high due to several reasons. These include stopping petrol subsidies, the Naira losing value, and supply chain issues. As the Naira falls, imported goods get more expensive, pushing up inflation.
A weaker dollar could help lower the cost of imports, possibly easing inflation in Nigeria.
Nigeria depends a lot on imported goods like food and fuel, which are big parts of the consumer price index.
But the impact on inflation could be mixed. While a weaker dollar could make imports cheaper, it might also increase global commodity prices, especially oil.
Nigeria relies heavily on oil exports. So, higher global oil prices could cancel out the benefits of a weaker dollar by making imported goods more expensive, keeping inflation high.
This could change if the Dangote Refinery starts producing fuel as planned in September, reducing the need for fuel imports and helping with inflation.
Exchange Rate Stability
Another factor to consider is the flow of capital into emerging markets like Nigeria. Lower US interest rates often lead investors to seek higher returns in places like Nigeria, which could boost demand for Nigerian assets and support the Naira.
For example, between 2017 and 2020, when US rates were near zero, Nigeria received about $5 billion each quarter in capital importation. During COVID-19, this dropped to around $1 billion a quarter but rose to $3 billion in early 2024.
This capital flow could help stabilize the exchange rate in the short term, easing pressure on the CBN to step into the forex market.
But this also brings risks. Capital flows can be volatile and quickly reverse. If global risk sentiments change or the Fed’s policy shifts suddenly, Nigeria might see a rapid outflow of capital, putting pressure on the Naira again.
Policy Implications: Finding the Right Balance
The CBN has a tough job ahead, balancing the benefits of a weaker dollar and more capital inflows against the risks of inflation and exchange rate volatility.
The CBN has already acted to stabilize the currency, but keeping this stability amid changing global monetary policies will be hard.
The Nigerian government also needs to work on fixing deeper economic issues.
Efforts to diversify the economy, improve revenue, and manage debt will be crucial to building a more resilient economy that can handle external shocks better.
Is it Time to Sell Dollars?
With the Naira possibly getting stronger or more stable, some Nigerians might think about selling their dollars.
However, while things might look up for the exchange rate, Nigeria still faces many economic challenges that could push the Naira down.
The International Monetary Fund (IMF) recently suggested that the Naira might fall to around ₦2000 per dollar by year-end, meaning the situation may not improve as much as hoped.
Instead of selling dollars in hopes of a stronger Naira, Nigerians might focus on earning foreign revenue.
If you have big foreign currency costs, like school fees, it might be better to keep your dollars. You can also buy dollars as the rate changes to spread out the impact of a weaker Naira.
Historically, the Naira has consistently dropped against the dollar. The factors affecting Nigeria’s currency have not changed much as the country still depends a lot on short-term capital inflows rather than foreign direct investment (FDI).
Also, Nigeria has not shown enough effort to increase exports or become self-reliant on locally produced goods.
—