BUSINESS and FINANCE

Naira depreciation

It seems the Nigerian government’s strategy to fix the Naira exchange rate has backfired already. The official exchange rate is fixed at N196 for every dollar, but this has not deterred the naira depreciation on the parallel market.

Nigeria has lately become a mono-economy, relying primarily on oil export for revenue. As global crude oil prices were tumbling down, revenue from crude oil exportation also dropped proportionally. This made the Nigerian federal government panic, and on June 11, 2015, they fixed the exchange rate at N196.90.

However, this strategy is clearly not working because despite the fixed exchange rate, a ‘black market’ has arisen. The unofficial exchange rate is referred to as the parallel market, and is unfortunately the rate recognized in day-to-day activities. While the official rate is fixed at N197.50 for every dollar, the exchange rate at the parallel market is as high as N390 for every dollar, which is almost double.

Crude oil prices bounced back slightly to trade at around $40 from lows of $27, and this somewhat boosted the Naira’s strength to between N310 to N320 in the parallel market.

Effects of the Naira depreciation

At the moment of the currency exchange fixing, President Buhari professed that this was the appropriate action to help Nigerians. Instead, the fixing has led to the rise of a black market exchange for the dollar that is actually responding to market forces. This has made imported items quite expensive, raising the price of goods and making them unaffordable to most people.

Strategies to curb the Naira depreciation

The federal government of Nigeria is currently discouraging imports and promoting locally produced goods. Since Nigeria relies mostly on oil exports, other industries such as agriculture have been neglected, and Nigeria has had to import a lot of agricultural produce. By encouraging locally produced goods, the country would not rely so heavily on imports and perhaps even the balance of trade. Other industries that may benefit from this include the shoes, textile and furniture sectors.

As a last resort, the Nigerian government could just borrow from the World Bank or through bonds. Revenue from oil has diminished and this has led to problems with job creation and employment. The government is actually looking to increase their cash reserves by borrowing from international markets.

What this means for Nigeria

Quite simply, the country is in trouble and there is need for drastic measures to prevent the decline of their economy. The president and Central Bank Governor remain adamant that the current measures are effective, but there is still more that needs to be done.

 

Further reading

Naira depreciation: Nigerians should look inwards – experts

 

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