Explained | What is pushing the Nigerian naira to record lows?

Nigeria's naira fell to a record low of 1,490 per dollar on Tuesday, bringing its losses to 40% since the start of this year, LSEG data showed, as the currency tracks weakness on the unofficial market where it trades freely.

President Bola Tinubu removed Nigeria's foreign currency controls last June in a bid to get transactions flowing through the official market again to help unify the naira's exchange rates.

But that has fuelled the currency's weakness and added to inflationary pressures.

Here is what you need to know about the naira.

Why is the naira falling?

The central bank has a backlog of accumulated forex demand on the official market, which effectively forces individuals and businesses to head to the black market if they need dollars.

But dollar flows to Nigeria have been falling in the last few years due to declining investment and lower exports of crude oil, which account for more than 90% of the country's export income.

Investors cheered when Tinubu lifted the currency controls, hoping a unified exchange rate would make it easier to access foreign currency, but that is yet to happen.

How big is the foreign currency backlog?

Africa's biggest economy has about $5 billion in forex forwards that have matured, a major concern for investors as foreign currency shortages continue to weigh down the naira currency, despite assurances by the Central Bank of Nigeria (CBN) that it would clear the backlog.

The CBN said on Monday it had stepped up settlement of the outstanding forwards with an additional $500 million payout, bringing to more than $2.5 billion the total amount cleared since new governor Yemi Cardoso took office in September.

How big are Nigeria's forex reserves?

The country's foreign exchange reserves dipped to a six-year low of $32.87 billion at the end of December, according to central bank data.

Last August, the central bank published audited accounts for the first time since 2018, and revealed that its reserves included a $19 billion commitment in derivatives - slashing the liquid amount of the reserves.

JPMorgan calculated that the country's net FX reserves stood at $3.7 billion as of the end of 2022, "significantly lower" than prior estimates.

Nigeria's crude excess account had $473,755 as of August last year, the last time the data was published, down from a peak of $20 billion in 2008, after successive governments withdrew dollars to support the naira and budget spending.

Will the Central Bank restore forex open positions?

Nigerian banks are not allowed to have open positions on the dollar, meaning that they cannot buy forex for their own account from the market or speculate on the value of the currency.

Banks use their open net positions on foreign currency to finance short-term trade lines without resorting to the central bank for bidding. That means banks "make the market" for dollars and provide two-way quotes for buying and selling the currency, effectively creating a fully functioning forex market.

Nigeria's 2024 budget assumes a benchmark exchange rate of 800 naira to the dollar.