We are going to discuss the causes of exchange rate fluctuation in Nigeria. We will also talk about the effect of exchange rate fluctuation on Nigeria’s economy.
What is Exchange Rate?
The exchange rate could be defined as the value of one currency against another currency. It is the value or rate of a currency when purchased with another currency.
Some people define it as the amount of a particular currency when converted to another currency. How much one United States dollar is valued in Nigeria’s naira and vice versa is known as the exchange rate.
Causes of Exchange Rate Fluctuation in Nigeria
1. Movement of Trades
The fluctuation of exchange rates in Nigeria is mostly caused by trade movements. Any difference in exportation or importation has a direct impact on the rate of exchange.
As we said earlier, the Nigerian economy solely depends on imported goods and services to survive, this is why the demand for foreign currencies has continued to skyrocket.
As long as importations exceed exportations, there is bound to be a rise in the demand for foreign currencies and this makes the exchange rate to move against the Nigeria naira. If exports where more than imports, the exchange rate would still change but it will move in favor of the naira.
The above is one major reason the Nigeria naira has continually decreased in value in recent times.
2. Inflation Rate
When there is a change in market inflation, there is bound to be a change in currency exchange rates. Nigeria is one of the countries that has experienced inflation in past years, inflation rose to about 16.5% in 2017.
In 2020, the inflation rate dropped to 13.5% but this is still a huge level compared with other countries. The high inflation rate in Nigeria is one of the major reasons that the Nigerian currency is depreciating.
Any country that consistently has a lower rate of inflation will surely exhibit a rise in its currency value, a country with a consistent or fluctuating inflation rate will likewise exhibit a depreciation and inconsistent currency value. This is one major problem that is facing the Nigerian naira and the economy of the country as a whole.
3. Country’s Current Account/Payment Balances
Spending more on importing products than earning through the sale of exports causes the depreciation of a country’s currency. In 2020, the Nigeria’s total external declined by a significant 10.32%, this presented a difference of N36.15 trillion in 2019. The total amount of Nigeria imports in 2020 stood at N19.89 trillion, the total amount of exports was N12.52 trillion.
With the above statistics, you can see that the amount spent on importation is more than what was spent on exportation, this causes depreciation of the Nigeria naira and fluctuation of exchange rates.
4. Government Debt
This is another major cause of exchange rate fluctuation in Nigeria and the cause of Naira’s instability. As at June 2021, Nigeria’s public debt totaled N33.1 trillion. A country with a huge government debt will not likely acquire foreign capital, this is what also leads to inflation. Of course we know that inflation causes fluctuations and instability in exchange rate.
A country that is experiencing a recession will likely witness a fall on interest rates and subsequently decreases its chances of acquiring foreign capital. Nigeria recently came out of recession but the effect of the recession continues to linger.
The economy of the country is being forecasted to grow at a more slow pace than the population, this is why there is a projection that the GDP per capita will continue to decline. These things negatively affect the naira and causes fluctuations in exchange rates.
Effect of exchange rate fluctuation on Nigeria’s economy
The continuous fluctuations of exchange rates in Nigeria have negatively affected the economy of the country. It has caused instability in the economy as well as a drastic increase on the prices of consumables in the country.
The importance of exchange rates and their continuous fluctuations to Nigerian citizens cannot be overemphasized. It might be interesting to ask, how much is a dollar to naira currently?
Well, Naira has been one of the worst performing or underperforming currencies in the world. Being considered a third-world country, the Nigerian currency has been extremely unstable in recent times and this has seen it continually going down the peck.
For one, Nigeria is a country with a non-convertible currency and this is one of the reasons the Naira has not witnessed significant growth in value over the years.
Secondly, Nigeria relies more on importation and almost solely depends on oil as the main goods for exportation. No significant thing is manufactured or produced in Nigeria for exportation, this is why the economy of Nigeria is almost controlled by foreign factors and economy.
The United States dollar controls more than 40% of financial transactions in Nigeria, investors and corporations are almost very comfortable carrying out transactions with the United States dollar. It may not be wrong to say that Nigeria is unofficially dollarized.
The ever-escalating demand for the United States dollar and Nigeria’s dependence on imported goods have continued to cause the devaluation of the Nigeria naira.