Nigeria’s economy has tanked in recent months due to inflation, interest rates, public debt and current account deficits. Nigeria’s inflation rate increased to 21.09% in October 2022, from 15.92% a year earlier. However, the volatile exchange rate also has an impact on Nigeria’s economic woes.
The term “Currency Exchange” or “Forex” refers to a global market where currencies from different countries can be exchanged. Forex markets are typically the largest and most liquid asset markets in the world due to the global nature of trading, finance, and commerce. Exchange rate pairs are used to compare currencies against each other and are considered comparable. Particularly in comparison to major currencies such as the dollar and the pound, the value of the Nigerian naira has declined significantly over the past few years.
The sale of foreign currency to Bureau de Change (BDC) operators was banned in 2021, and the Central Bank of Nigeria (CBN) also stopped approving license applications for Bureau De Changes. This CBN monetary policy was aimed at bringing stability and transparency to the foreign exchange market. Except for the fact that currency supply and demand dictate prices and rarity, this appeared to be a way to reduce the illegal underground dominance of the market.
Why does this matter? The value of an item is increased by its rarity. In other words, the ban on forex traders increases the demand for currencies, favoring them over the Naira. Excessive demand for foreign currency reduces the value of the domestic currency until both domestic goods and services are competitively priced enough to attract international customers.
In foreign markets, a country’s exports are more expensive and its imports are less expensive when its currency is valued more. It is reasonable to anticipate that a rising exchange rate will hurt a nation’s balance of trade.
High exchange rates in trade
A major problem affecting the Nigerian economy and having a triple impact on businesses has been identified as the worrisome exchange rate. To import basic goods and raw materials because the weakening of the naira can no longer be controlled, many Nigerians need the dollar.
As a result of these issues, companies are experiencing low patronage. Many consumers are looking for alternatives to high prices, such as the sachet of things, satisfying demands on a scale of choice, and reducing quantities. If the CBN reduces burdensome currency regulation and nominal standard rate pricing, the demand for and supply of dollars could actually work to balance the market and trading activities.