In recent months, inflation, interest rates, public debt, and current account deficits have contributed to Nigeria’s economic downturn. In October 2022, Nigeria’s inflation rate increased to 21.09 percent, up from 15.92 percent the previous year. However, the volatile currency exchange rate impacts Nigeria’s economic problems.
“Foreign Exchange,” also known as “Forex,” refers to a global market in which currencies from various countries can be exchanged. Because of the global nature of commerce, finance, and trade, the forex markets are frequently the world’s largest and most liquid asset markets. Exchange rate pairs are used to compare currencies and are considered comparable. The value of the Nigerian naira has declined significantly in recent years, particularly in comparison to important currencies such as the dollar and the pound.
In 2021, the sale of foreign currency to Bureau de Change (BDC) operators was prohibited, and the Central Bank of Nigeria (CBN) stopped approving requests for Bureau De Change licenses. The CBN’s monetary policy was designed to bring stability and transparency to the forex market. Except for the fact that forex supply and demand dictate prices and scarcity, this appeared to be a method of reducing illegal subterranean market dominance.
What is the significance of this? The rarity of an item increases its value. In other words, prohibiting forex market participants increases demand for foreign currencies, favouring them over the Naira. Excessive demand for foreign currency depreciates the national currency until domestic goods and services are competitively priced enough to attract international customers.
When a country’s currency is valued higher, its exports are more expensive, and its imports are less expensive in foreign markets. It is reasonable to expect a rising exchange rate to harm a country’s trade balance.
High Trade Exchange Rates
The unsettling exchange rate has been identified as a major issue affecting the Nigerian economy and having a threefold impact on businesses. Many Nigerians require the dollar to import commodities and raw materials because the naira’s depreciation is no longer controlled.
Businesses are experiencing low patronage as a result of these issues. Many consumers seek alternatives to high pricing, such as schematization, demand on a scale of choice, and quantity reduction. Demand and supply of dollars could work to balance the market and trade activities if the CBN reduces onerous forex regulation and price-fixing of the nominal standard rate.
