Examining the Impact of Exchange Rate Volatility in Nigeria



Friday, Aug 06, 2021 / 8:50 a.m. / By FDC Ltd / Header image credit: Nasdaq

Exchange rate stability is a major macroeconomic indicator used to measure the performance of an economy. The Nigerian forex market has undergone significant changes over the years. The foreign exchange market went from a fixed regime in the 1960s to a pegged regime between the 1970s and the mid-1980s, and to various types of floating systems managed since 1986 (the period of the structural adjustment program) .

The country currently has multiple exchange rates (parallel, bureau de change, IATA, investor and exporter counter, but to name a few) and is currently adopting the managed floating exchange rate system. On May 24, 2021, the CBN officially replaced the official exchange rate with the more flexible Nigerian Autonomous Exchange Fixation Rate (NAFEX) in an effort to unify the country’s multiple exchange rates. This replacement means a technical devaluation of the naira of 7.56% at the NAFEX rate (410 N / $) compared to the previous official rate of 379 N / $.

However, the exchange rate remained volatile in the parallel market, driven by speculative activity and panic buying. Uncertainty over the CBN’s foreign exchange policy not only prompted profiteers to act, but also kept investors at bay, stopping REIT inflows.

Proshare Nigeria Pvt.  Ltd.

Exchange rate volatility and its impact

Two sectors very vulnerable to exchange rate volatility are trade and manufacturing and both have a combined contribution to GDP of 25.54% .5 Nigeria is an import dependent country, which makes it highly vulnerable to volatility of exchange rates. In the first quarter of 2021, Nigeria’s total import bill was 6.85 billion naira compared to 2.91 billion naira in export earnings. Rising world prices coupled with the depreciation of the naira made imported goods more expensive, resulting in a higher import bill for the government. It has also led to an increase in the cost of domestically produced products, as manufacturers pass the cost burden on to consumers in the form of higher prices. CBN’s forex rationing has prompted many manufacturers to adopt a blended exchange rate to meet their currency needs. Also due to foreign exchange shortages and the high cost of imported items, the trade sector has been affected as retail and wholesale traders find it difficult to stock up according to their inventory levels. As a result, many imported items are either scarce or very expensive when available.

Go forward

There are two options that the CBN could adopt in its forex reform path. One is full convertibility of the naira and the other is the adoption of a sliding parity and gradual convergence of multiple exchange rates.

Proshare Nigeria Pvt.  Ltd.

Both options have their pros and cons. While full convertibility of the naira will have a positive impact on the country’s trade balance, which is in deficit of 3.94 trn7, Nigeria’s capacity utilization remains low. Countries that benefit from a fully convertible exchange rate have a high export base and can increase their exports to take advantage of the weaker currency. Nigeria’s main export (or only if we are straightforward) is petroleum. The unintended consequence of a fully convertible currency is the sharp increase in the costs of servicing the external debt due to the weakness of the currency. This situation would be exacerbated when global interest rates started to rise. The other option of a peg crawling reduces the impact of a sharp rise in prices. However, this will encourage speculative activity and panic buying in autonomous markets.

Proshare Nigeria Pvt.  Ltd.

Related news

The New Forex Ban and Its Short-Term Market Response

Management of the exchange rate in Nigeria should be free from political interference

Ecobank Nigeria Ensures Customers A Smooth Forex Transaction

Management of the exchange rate in Nigeria should be free from political interference

Naira depreciated by -2.40% WoW in parallel market at an average exchange rate of N512

Market Pulse: a historic nostalgia – Reliving the crackdown on BDC operators

BDC market implodes as CBN stops selling dollars to parallel market

CBN to reimburse minimum capital deposits and license fees to BDC promoters

CBN orders DMBs to set up ATMs in bank branches for the sale of currency to retail customers – Jul 29, 2021

CBN stops selling currencies to BDCs and keeps policy settings constant – Jul 27, 2021

Communiqué CBN n ° 137 of the meeting of the MPC – July 26-27, 2021

July 2021 MPC meeting: CBN holds all policy parameters and stops foreign exchange sales to BDCs

CBN suspends currency sales to BDCs until further notice

Ban on the sale of CBN FX to BDCs: financial and market players react

Total IEFX Marketplace Transaction Value Decreased $ 325.65 Million on WoW, Down 49.86% – FMDQ

FMDQ foreign exchange market analysis report for the weekend of July 16, 2021

FMDQ foreign exchange market analysis report for the weekend of July 9, 2021

Gross official reserves down $ 910 million to $ 33.32 billion in June 2021

Foreign currency outflows still below pre-pandemic levels

Continued underperformance of remittances in Q4 2020

FMDQ foreign exchange market analysis report for the weekend of July 2, 2021

Analysis of the foreign exchange market (FX) for the weekend of June 25, 2021

Foreign exchange reserve at 13-month low despite significant rebound in oil prices

Telecoms: currency scarcity continues to weigh heavily

Analysis of the foreign exchange market (FX) for the weekend of June 18, 2021

Proshare Nigeria Pvt.  Ltd.
Proshare Nigeria Pvt.  Ltd.


Leave A Reply

Your email address will not be published.