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FG printed more naira than FX reserve

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By Abraham Adekunle

An overview of causes of and solutions to Nigeria's currency crisis.

Nigeria is currently grappling with a severe currency crisis, marked by a staggering 50% depreciation of the naira against the US dollar within the past year. At the heart of this crisis lies a critical decision by the government to resort to printing more money than it had in foreign reserves, a move aimed at addressing budget deficits and settling outstanding debts. The fiscal challenges date back to 2015 when the collapse of global oil prices, a primary revenue source for Nigeria, set the stage for a prolonged economic struggle.

The government responded by accumulating significant domestic and foreign debt, pushing the public debt to over 35% of the GDP by 2020. The subsequent onslaught of the COVID-19 pandemic further strained the economy, leading to a liquidity crunch and a struggle to meet debt obligations. To avert defaulting on its debts, the government opted for the perilous path of printing more naira. The Central Bank of Nigeria (CBN) reported a startling increase in the government’s overdraft facility, soaring from 2.4 trillion naira ($6 billion) in 2019 to a staggering 10 trillion naira ($24.5 billion) in 2020, amounting to 12% of the GDP.

Hyperinflation occurred as a result of this step.

Notably, this surpassed the total amount of dollars held in the CBN’s foreign reserves, which stood at $35.4 billion by the end of 2020. The consequences were swift and profound. The naira’s overvaluation became unsustainable, prompting the CBN to maintain a fixed exchange rate of 380 naira per dollar. However, this led to a glaring disparity between the official rate and the parallel market rate, exceeding 500 naira per dollar by December 2020. In response, the CBN enforced stringent capital controls and rationed foreign exchange, resulting in a shortage of dollars and impeding both trade and investment.

Then, the excessive supply of naira, coupled with the scarcity of dollars, triggered a rapid depreciation of the national currency and a surge in inflation. The annual inflation rate skyrocketed from 11.4% in December 2019 to 18.1% in April 2021, reaching levels unseen since 2017. Notably, food inflation soared even higher, hitting 22.7%. This reflected the impact of currency devaluation on import costs and domestic food production, exacerbating the challenges faced by the poor and vulnerable, who allocate a substantial portion of their income to food.

Printing of excessive money must cease to address the problem.

Furthermore, the repercussions extended beyond inflation, adversely affecting economic growth and development. In 2020, the GDP contracted by 1.8%, marking the nation’s second recession in five years. The unemployment rate surged to a staggering 33.3% in the fourth quarter of 2020, a record high. Concurrently, the poverty rate climbed from 40% in 2019 to 45% in 2020, indicating that over 100 million Nigerians were living below the international poverty line of $1.90 per day.

To extricate itself from this dire situation, the Nigerian government must cease the practice of printing money and instead embrace a comprehensive fiscal and monetary policy framework. This framework should aim to restore macroeconomic stability and instill confidence in the economy. One crucial step involves reducing the fiscal deficit by augmenting revenue streams and streamlining expenditures. Concurrently, the CBN must permit the exchange rate to reflect market forces and eliminate the existing multiple exchange rate regime.

Strict monetary policies should also be put in place.

Also, a tightening of the monetary policy stance and a reduction in lending to the government are imperative to curbing inflation and fostering private sector credit. In adopting these measures, Nigeria stands a chance to avert a hyperinflationary scenario that would further impoverish its citizens and compromise its economic potential. Despite the challenges, Nigeria possesses the latent capacity to transform into a prosperous and diversified economy, provided decisive actions are taken to address the prevailing currency crisis before it spirals out of control.


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AN-Toni
Editor
1 month ago

FG printed more naira than FX reserve.An overview of causes of and solutions to Nigeria’s currency crisis. – Express your point of view.

Taiwo
Member
1 month ago

In comparison to FX reserve, FG issued more naira. An outline of Nigeria’s currency crisis’s causes and remedies. Our massive printing of money, which exceeded our foreign reserve, is one of the reasons why the value of our naira has declined as well. We can’t afford these errors in our fragile economy.

Adeoye Adegoke
Member
1 month ago

The fact that the government printed more naira than the foreign exchange reserve is definitely a contributing factor to the crisis.
When a country prints more money than its foreign exchange reserves, it can lead to inflation and a devaluation of the currency. This can have negative effects on the economy, such as eroding purchasing power, increasing import costs, and discouraging foreign investment.
To address the currency crisis, it’s important for the government to implement sound monetary policies and fiscal discipline. This includes maintaining a balance between money supply and foreign exchange reserves, as well as ensuring transparency and accountability in the management of public finances.
Improving the ease of doing business, attracting foreign investment, and strengthening institutions that oversee financial stability and regulation are also crucial steps towards resolving the currency crisis.
It’s important for the government, financial institutions, and stakeholders to work together to find sustainable solutions that promote stability, boost investor confidence, and ensure the long-term prosperity of Nigeria’s economy.
Remember, I’m here to chat and share perspectives, but it’s always a good idea to consult with financial experts and stay updated on the latest developments in the currency crisis for a comprehensive understanding.

Kazeem1
Member
1 month ago

in order to manage budget shortfalls and pay off outstanding obligations, the government made the crucial choice to create more money than it had in foreign reserves.The Nigerian government should give up on money printing and adopt a coherent framework for both fiscal and monetary policy. preserving the equilibrium between foreign exchange reserves and the money supply

SarahDiv
Member
1 month ago

Nigeria is grappling with a severe currency crisis, marked by a 50% naira depreciation against the US dollar in the past year. The root cause lies in the government’s decision to print more money than foreign reserves, exacerbating inflation and economic challenges. To address this, the government must cease excessive money printing, adopt fiscal and monetary policies to restore stability, and eliminate multiple exchange rates. Tightening monetary policies and reducing reliance on borrowing are crucial steps to avert hyperinflation and set the stage for a prosperous and diversified economy.