The dropping Naira and its Impact
One very certain gauge of a country’s economic wellness is the strength of its currency compared to others. Foreign Exchange (ForEx) is one of the strongest indicators of a country’s economics’ wellness. It provides an opening to its economic stability. Understandably, the observation and analysis of the ForEx is very essential.
The exchange rate is the rate at which one country’s currency may be converted into another. There are certain possibilities of its fluctuation from time to time due to the changes in market forces of demand and supply of currencies from one country to the other.
Various factors can account for the variations and fluctuations of the foreign exchange. They include; inflation rates, interest rates, country’s account or balance of payments, government debt, political stability and performance, recession and speculations.
The naira has seen a strong decline against the dollar in recent times and could still see more falloffs in coming times. Amidst the world economic downfalls and the crash in oil prices, the fear is that the naira will most certainly fall against the dollar. Fx currently stands at 404 Naira per dollar in the parallel market. Within one week, it fell by 6.3% from 380 naira per dollar.
With the current fears of the rising debt profile coupled with the tumbling prices of oil and its ripple effect on the external reserves, the chances the naira recovers soon against the dollar any time soon are slim.
Interestingly, the heavy expenditure on importing refined petroleum products too has a serious bearing on the situation at hand as well. This invariably takes a sizable chunk of the revenues. Apparently, the dollar has a substantial effect on the price of things in Nigeria as the fall in exchange of the naira against the dollar triggers an increase in price of other commodities.
The crux of the matter is this; the demand for dollar in Nigeria is enormous. Nigeria does not generate enough to satisfy this demand. Worryingly, the only source of our ForEx happens to be the crude oil we sell internationally. With the crude oil price going down currently, the demand might tremendously exceed supply. There is no gainsaying that our over-reliance on proceeds from crude oil is ultimately taking a scary toll on the economic outlook.
The harsh realities
The truth is Nigeria may be heading for a heavy dose of inflation, while purchasing power might be eroding, and interest rate might also head northwards. With public spending a core GDP driver, we may experience a dip in growth with potentials of recession if the current situation persists. We may also see a depletion of the external reserves and possibly a drop in credit ratings hence an increase in the cost of borrowing of a scary debt portfolio.
Is there any way out of these worries?
Firstly, we need pragmatic policies to make the naira convertible. Efforts must be in place to make sure the naira is readily available for convertibility so as to ease international trade.
Also, there must be fiscal and monetary policies to regulate and appreciate the naira.
Correspondingly, the increase of interest rate and a long overdue devaluation of naira as well would ease the economic tension a bit and restore perceptions of faith from the financial actors.
Moreover, an establishment of an effective and efficient process of the reduction of fuel subsidy would be a necessary palliative.
Furthermore, the over-dependence on oil is a major reason for this much exposure to international economic shocks. It is time to stop all procrastination and lethargic waits. We need to get down to serious work on exploring and determining various revenues streams for the government rather than oil. Investments in research and development as well can be progressive implements.