Naira could drop drastically in the future as forex issues persist

folarin okunola

July 29, 2016 1:31 PM

Inflation has been on the rise, oil production has been cut down due to the activity of militant groups, as the CBN seems unable to find a clear cut route out of the quagmire.

A trader changes dollars for naira at a currency exchange store in Lagos, Nigeria, February 12, 2015. REUTERS/Joe Penney/File Photo

Analysts are predicting that the Naira could drop to 400/Dollar on the parallel market. The CBN recently increased the interest rate from 12% to 14% as Nigeria continues to battle a slowing economy, inflation, and potential recession.

Several analysts have predicted that the Naira, still suffering from bad CBN policies and a lack of foreign investment amidst enormous demand for the greenback, will bear the brunt of most of the economic pressure.

Inflation has been on the rise, oil production has been cut down due to the activity of militant groups, as the CBN seems unable to find a clear cut route out of the quagmire.

Though the CBN implemented a so-called 'float' of the Naira after an 18-month peg, the currency has continued to drop dramatically on the interbank market and the parallel market.

Little trading is taking place on the interbank market with an average of $40 million a day, according to South Africa-based Standard Bank Group. In 2013, daily trading volumes were as high as $1 billion.

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Trading on the interbank market has also been stunted because dollar purchases have to be backed by customer orders, which means primary dealers and other banks can't trade for a profit on their own behalf.

After meeting with investors last week, the CBN has come out to say that nothing has changed. “Investors should allow the market some time to work itself out,” said spokesman Isaac Okorafor, according to a Bloomberg report. “No one is fixing any prices. The market is not bound to pander to unrealistic and speculative projections.”

Analysts are already predicting that it is very likely that the Naira will eventually drop further and hit the N400/dollar mark in the near future.

Even if the CBN does eventually free the Naira properly, Nigeria still faces a tricky situation. With inflation rising, the economy weakening and drop in oil production, the future holds a lot of pressure for the Naira as the market pushes for more flexibility.

We wait to see.

folarin okunola