The depreciation of Nigeria’s naira has resulted in a ₦13.38tn increase in the country’s external debt. Data from the Debt Management Office reveals that while the total external debt increased by $490m from the first quarter to the second quarter of 2023, the value in naira saw a substantial rise.
The key factor behind the notable contrast in naira terms is the devaluation of the naira, a consequence of the Central Bank of Nigeria’s initiative to harmonise the nation’s foreign exchange rates.
On June 14, 2023, the CBN directed Deposit Money Banks to lift the rate cap on the naira at the official Investors and Exporters’ Window of the foreign exchange market, enabling it to float freely against the dollar and other international currencies.
It said, ‘The Central Bank of Nigeria wishes to inform all authorised dealers and the general public of the following immediate changes to operations in the Nigerian Foreign Exchange Market: Abolishment of segmentation. All segments are now collapsed into the Investors and Exporters window.’
As a result of this decision, the naira experienced an immediate devaluation, plummeting from its previous rate of 471 naira to the dollar to 770.38 naira to the dollar as of last week Friday, as reported by data from the FMDQ Exchange.
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Meanwhile, the naira’s fortunes have been marked by ongoing fluctuations within the Investors & Exporters’ window, exacerbating its condition in the parallel market, where it reached N1000/$ last week.
As part of its adherence to the Central Bank of Nigeria’s unification strategy, the DMO decided to discard the N460.35/$ rate from Q1 2023 and instead embrace ₦770.38/$.
This reflects a 40.24 percent devaluation in the exchange rates put into use by the debt office.
The data from DMO indicates that Nigeria’s external debt reached $43.16 billion in Q2 2023, as opposed to $42.67 billion in the previous quarter.
When measured in naira, the debt witnessed a substantial rise to N33.25 trillion in Q2 2023, up from N19.64 trillion in the preceding quarter, marking a significant increment of N13.61 trillion.
However, the predominant factor contributing to this substantial surge is the weakened naira rather than increased borrowing.
If the same exchange rate of N460.35/$ from Q1 had been applied to Q2, Nigeria’s external debt would have amounted to N19.87 trillion in naira terms.
However, the devaluation of the naira added N13.38 trillion to Nigeria’s external debt in Q2 2023.