There have been some ban on the naira and on foreign exchange by Central Bank and/or by the Federal Government, just to ensure the naira is strengthened against the dollar. Yet the naira keeps falling. Why is that so?
Despite Nigeria’s central bank effort to hold the naira at a minimal and reasonable rate against the United State’s dollar, the real value of the national currency is falling.
It will be noteworthy to know that tight regulations and restraints that have been clogging the market of foreign exchange, cause an outflow of foreign investment, and that doesn’t add any good to the desperate economic situation.
There are various reasons why the naira keeps falling, but our major focus will be based on the falling price of oil and it’s effect on the Nigerian economy.
Of late, many state governments were unable to pay the salaries as their monthly allocation from the federal government falling drastically due to falling oil revenues. Now the federal government has only one immediate solution to that problem – printing more money which means starting the mechanism of further inflation. And this is a possible reason for naira’s fall.
Nigeria’s economy is largely dependent on oil revenue, so when oil prices fall, it affects our economy and the naira loses value – it depreciates.
Also the decreasing demand for Nigeria’s crude oil in the international market. Due to that the Nigerian National Petroleum Corporation had to reduce the price of the country’s crude oils to their lowest points in over a decade. World Bank ex-vice president, Dr. Oby Ezekwesili, has warned recently in an interview that Nigeria is facing hard times as it has to end what she called the “addiction to free oil money”.
The oil price drop makes it difficult for the CBN to defend the naira, hence the devaluation.
According to a report on the Leadership, Naira devaluation will have positive and negative effects on the economy. On the negative side, it will increase the rate of importation, and industries that can’t afford to import raw materials will shut down which will also lead to unemployment, lower production capacity and bring about inflation.The devaluation will also discourage people from patronizing the regulated exchange agents such as the banks and the Bureau de Change. Nigerians Parents will have to pay more for their children’s school fees if it is paid in dollars or they study in foreign schools.
On the other side, Workers and Companies who gets their earnings in dollars will be smiling to the bank a lot these days. The Federal and State governments stand to gain from the devaluation, as they earn revenue in dollars. Foreign investors who invest in Nigerian stock market, treasury bills, bonds get an additional 8% increment in less than a month. Same goes for Nigerian banks and Speculators with dollar savings.
The Naira will continue to fall as long as the oil price keeps going down, and if the CBN further restricts the inflow of dollars from the foreign reserves into the market, Naira might fall furthermore.
It’s high time the economy of the nation got diversified and local production should be encouraged. Total dependence on oil will cause more harm than good.