Currency traders and investors say Nigeria’s chronic dollar shortage, a constant gripe of businesses operating in the country, has recently turned into a crisis. The naira, which officially trades at N421 to the dollar, has fallen to N700 in the parallel market, with talks that it could weaken further. “It’s really a perfect storm,” said Iyin Aboyeji, a fintech entrepreneur in Lagos. “No one could have predicted it: low oil production and high dollar demand.” On the supply side, dollar revenues from oil have plummeted due to the massive theft, reducing official daily crude output to 1.1 million barrels, well below Nigeria’s OPEC quota of 1.8 million. b/d. Angola has now usurped Nigeria as Africa’s largest oil producer. Nigeria’s petrol subsidy, under which its car owners enjoy among the cheapest fuel in the world ($0.40/litre), means the federal government receives less revenue. The higher the price of oil, the greater the difference between the actual and the subsidized price, and the higher the bill for the government. Nigeria is estimated to spend $9.6 billion on oil subsidies this year, about 2 percent of gross domestic product and nearly 10 times the budgeted amount. On the demand side, August is always a critical month because an estimated 100,000 Nigerians need dollars for tuition abroad. Political parties also scrambled to find dollars to hand out to delegates in presidential primaries held in May and June, pushing supply and demand even further apart. Central bank governor Godwin Emefiele may have compounded the problem by warning politicians that those caught changing naira into dollars on the black market would be arrested. Wilson Erumebor, an economist at the Nigerian Economic Summit Group, a think tank, said of the widening black market gap: “If we had enough supply of foreign currency, this would never be a problem.” The collapsing naira makes imports more expensive, fueling inflation, which hit a 17-year high of 19.6 percent in July. The central bank has raised interest rates by 250 basis points to 14% since May. Nigeria has a complex and opaque exchange rate regime with multiple exchange rate “windows”. The central bank is seeking to manage tight supply and prioritize the allocation of dollars to sectors of the economy, such as agriculture, that it sees as a priority. Last year, the bank stopped selling dollars on trading exchanges to protect its limited $38 billion in reserves, further spooking the market. “The black market is the free market,” said Aboyeji, who added that Nigerians who need dollars for things like school fees should use the parallel market instead of getting the actual subsidized dollars at the official rate. Investors complain that the multi-window system is unnecessarily opaque. Those receiving dollars can buy naira on the black market in a gambit known as “spinning”. Nigeria’s dollar crisis has its roots in the 2014 oil price crash, when prices fell 52 percent in six months. The federal government, which collects taxes worth only 6 percent of GDP, one of the lowest rates in the world, earns most of its revenue and nearly 90 percent of its foreign exchange from oil exports. NESG’s Erumebor said Nigeria’s problems were compounded by the lack of significant exports in sectors other than oil. Figures from the National Bureau of Statistics put Nigeria’s non-oil export earnings in 2021 at $16 billion against $145 billion from crude oil sales. Years of underinvestment in oil infrastructure have eroded production, meaning Nigeria has not benefited from higher oil prices resulting from Russia’s invasion of Ukraine. Widespread theft of crude oil, estimated by the National Petroleum Corporation of Nigeria at 400,000 barrels per day, has reduced production. Some pipelines have suspended operations, including a Shell facility that shut down in June. Nigerian authorities have awarded a contract to the government of Ekpemupolo, a former Niger Delta militant, for pipeline security. Nigeria’s other sources of foreign exchange earnings have also declined. Foreign direct investment in 2021 was just under $700 million, down from $3.1 billion at the start of President Muhammadu Buhari’s tenure in 2015. Mosope Arubayi, an economist at IC Group, an investment consultancy, said Nigeria has become less attractive to foreign investors, thanks in part to the difficulty of repatriating revenue. “The foreign exchange market is very tight in terms of liquidity,” he said. “Nigeria relies heavily on oil inflows, but you need other capital flows such as remittances, most of which do not go through official channels.” Half a dozen analysts and executives interviewed by the Financial Times, who declined to be named for fear of central bank retaliation, said the bank’s policies were hurting the investment environment.

“They are not giving you any indication of when you will be able to take your money out of the country,” said one executive, adding that their firm will not make any further investments until the issue is resolved. “Investors are moving away.” Experts said there would be no major change in strategy before the presidential election next February. But Renaissance Capital’s Charlie Robertson said the central bank may just be delaying the inevitable. “In the face of economic realities, you don’t have the resources to fight the market forever,” he said.