On Monday, October 30th, the naira weakened 26% against the dollar on the official market, touching its lowest closing price on record. It closed at 993.82 to the dollar from 789.94 in the previous trading day.
The naira is having its worst run against the dollar this year because of an acute dollar shortage in Nigeria. Dollar liquidity at the market dropped by two-thirds from a day earlier to $88.3 million. And curbing this losing streak won’t come cheap. The concern now lies around how Nigeria wants to solve its dollar shortage, and how quickly it can do so.
The forex reforms Nigeria made mid-year haven’t yielded the desired results of attracting inflows. Also, oil production —Nigeria’s primary source of forex— has been constantly lower than its OPEC quota of 1.8 million barrels a day. So, the country is seeking liquidity-boosting alternatives.
Last week, Wale Edun, Nigeria’s Finance Minister, said the government expects to attract $10 billion of inflows in the coming weeks to help ease liquidity constraints and clear a backlog of arrears of matured forward contracts weighing on the currency. Nigeria tops the list of countries with trapped airline funds, according to a June report by the International Air Transport Association. The country accounts for $812.2 million of the $2.27 billion trapped globally.
A crucial part of this plan is to securitise about $7 billion of the country’s dividends from the Nigerian Liquefied Natural Gas (NLNG). The deal means Nigeria wants to collect its five-year dividend payments for owning 49% of NLNG now. The government will also cover the interest payments for that five-year period.
According to the government, this liquidity ought to come from a consortium led by Standard Chartered Bank from this week. But while it may seem too early to conclude, the prospects of this deal closing so soon are not bright. Deals with this kind of volume often take longer because stakeholders will spend time at negotiation tables.
The deal also has a steep downside: Nigeria will need to survive without dividends from NLNG for the next five years. Revenue from NLNG has fluctuated over the years, but never been non-existent. Payouts were as high as $1.04 billion in 2015, and then crashed to $356.13 million in the next year. In the following years, it paid $798.14 million, $904.5 million, $915.65 million, $545.13 million and $722.44 million.
Between 2015 and 2021, the company paid out $5.3 billion in dividends to the government. And that includes a record year. And according to Nigeria’s projections, it should recieve N749 billion between 2023 and 2026. But now that productivity is declining, it will likely take longer to earn as much as $7 billion.
The other $3 billion the Nigerian government is hoping for is from an oil-for-dollars scheme for NNPC. This deal is for the state-owned oil company to receive $3 billion from the African Export-Import Bank (Afreximbank). The government announced it in August, but hasn’t been able to secure investors.
At the same time, the country plans to introduce new foreign exchange rules, including a crackdown on illegal currency trading. According to Taiwo Oyedele, chair of the presidential committee on fiscal policy and tax reforms, Nigeria’s government wants to expand the official market to include all legitimate transactions, while snuffing out the illicit “black market” for foreign currency.
The coming weeks will tell whether Nigeria would be able to improve the naira’s stance at the forex markets. If these deals come through early enough, they will temporarily boost dollar supply. But Nigeria’s government is hoping this play will be enough to bring investors on board and achieve a more long-lasting solution.