The depreciation of Nigeria’s currency, the naira, has led to a substantial increase in the country’s external debt by N13.38tn during the second quarter of 2023.
While the total external debt increased by $490m between the first and second quarters of 2023, the significant surge in naira value is primarily attributed to the naira’s devaluation.
This devaluation was initiated by the Central Bank of Nigeria’s decision to unify the nation’s foreign exchange rates.
On June 14, 2023, the Central Bank of Nigeria instructed Deposit Money Banks to remove the rate cap on the naira at the official Investors and Exporters’ Window of the foreign exchange market, allowing it to freely float against the dollar and other global currencies.
This policy led to an immediate decline in the naira’s value, plummeting from 471/$ to 770.38/$ within a short period.
Furthermore, the naira’s value continued to fluctuate in the Investors & Exporters’ window and worsened in the parallel market, reaching N1000/$ at one point. Consequently, the Debt Management Office (DMO) adapted to the new exchange rate environment, discarding the N460.35/$ rate used in Q1 2023 and adopting N770.38/$, marking a significant depreciation of 40.24% in the exchange rates applied by the DMO.
According to DMO data, Nigeria’s external debt stood at $43.16bn in Q2 2023, up from $42.67bn in the previous quarter. In naira terms, the debt soared to N33.25tn in Q2 2023, compared to N19.64tn in the preceding quarter, representing a staggering increase of N13.61tn.
However, it’s crucial to note that this substantial rise is primarily attributed to the weakened naira rather than increased borrowing. Had the same exchange rate of N460.35/$ from Q1 been used in Q2, Nigeria’s external debt would have remained at N19.87tn in naira terms.
In summary, the weak naira added N13.38tn to the country’s external debt in Q2 2023 due to the currency’s devaluation.
