Back in January, Gunther Kuschke, a sovereign-risk analyst at RMB, the investment banking unit of Johannesburg-based FirstRand Ltd., citing substantially dwindling crude oil revenue (which accounts for upwards of 90% of Nigeria’s foreign exchange earnings), predicted that the naira would weaken further and hit N170 to US$1 by year-end. It currently sits at N147.25 on the interbank market (charted right through May 14th from last November’s run-up).

Crude’s run-up since 2006 helped Nigeria amass $51.32 billion of foreign reserves by the end of 2007 year end (it peaked at $63 billion last December), while the naira appreciated by roughly 10% against the US dollar. Its value then stabilized at around $116/US$1 until late November 2008. During this time, Nigeria became Africa’s largest FDI recipient, according to data from United Nations Conference on Trade and Development (UNCTAD).

When crude began its plunge, however, the Nigerian central bank (CBN) opted to begin to defend the suddenly vulnerable currency (caused by foreign investors selling the nation’s assets) by limiting sales of dollars to commercial banks in order to protect its reserves. Nonetheless, per Bloomberg, the country’s foreign reserves fell by more than $10 billion from the end of November, and sales of foreign exchange to banks dropped as low as $100 million in November compared with demand as high as $1.3 billion in the same month. According to one economist, Nigeria’s middle class of roughly 20 million people will have an estimated demand for foreign exchange of between $20 billion and $100 billion for the remainder of 2009.

So the question remains, exactly how long can/will the CBN essentially burn through its reserves defending the naira? “We don’t want to repeat the Russian experience of spending reserves to defend currency. We cannot do it forever,” said Chukwuma Soludo, the CBN governor, who also reiterated that he’d ultimately like to allow the naira to trade “within a band of plus or minus 3% from the central bank’s rate”, without specifying the target level. Many observers point out that further defense may be fruitless anyway, or even counter-productive and contrary to pragmatic, longer-term measures to, say, address the fiscal deficit or fund additional and much-needed infrastructure investment? Of greater concern may be Nigeria’s credit ratings. S&P, which affirmed Nigeria’s “BB-” foreign currency and “BB” local currency long-term sovereign credit ratings in late March, concurrently lowered the nation’s ratings outlook to “negative” from “stable”, citing falling oil revenues which hurt public finances.

In the backdrop (or perhaps the forefront?) of Nigeria’s currency fiasco has been the role of speculators in the currency’s “parallel” market. When the CBN restricted commercial banks from reselling foreign exchange bought at auction or any other sources on the interbank market, the black market (not surprisingly) boomed. Rates reached as high as N190 per USD, which the CBN blamed on hoarding.

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