Ever wonder what makes the naira keep falling in the international market and hence increases the rate of foreign currencies like the dollar, pound, and euro against its value in the exchange rate?
Also, 1000 naira worth of household or food items bought in November 2021 would cost 4000 naira in November 2023. That is a 400% increase. So why the increase, you might ask?
The fall of the naira has consequently raised the cost of living in the country. Nigeria, with a population of about 200 million people, now has close to 100 million people living on less than 1.8 US dollars per day.
In this article, we examine the reasons why the naira keeps falling and how this has caused inflation in the country.
(1). Low export rate to import:
The importation level of the Nigerian economy is high compared to the country’s exports. The higher the export level of a country, the more valuable the currency is for the country, because there would be demand for the country’s resources and hence its currency for trade. But in the case of Nigeria, the international demand for the naira is low because the country’s export trade is low and its imports are high.
One of the reasons for the country’s low export rate for its imports is the country’s dependency on crude oil exports, and this makes the government give low development attention to the non-oil sector for exports which would have additionally enhanced multiple sources of government revenue.
(2). Low forex reserves by commercial banks:
One of the responsibilities of the country’s commercial banks is the circulation of not only the naira but also foreign currencies, which are made available for international trade and investments. These are supplied to them by the Central Bank of Nigeria. But when there is no supply from banks for investors to trade in the international market, then there would be a demand for foreign exchange in the parallel market, which is the black market. The black market is an unofficial foreign currency trader.
The high demand for forex (foreign exchange) in the parallel market creates a channel for it to inflate the exchange rate and so devalue the naira against foreign currencies like the dollar, pound, and euro.
This is the reason why the naira is falling.
Recently, the government settled some forex backlog demands from some banks, airlines, and financial organizations.
These forex backlogs are paid by the Central Bank to banks for forex trading to enable smooth financial operations, stabilize interest rates, stabilize the value of the naira, and not put forex control in the hands of the parallel market, which can lead to the devaluation of the naira.
After some forex backlogs were settled, the exchange rate went from 1,300 naira to 1 dollar.
(3). Inefficient government policies in market price control:
One of the main aims of market price control is to protect consumers against exorbitant market prices in the capitalist market.
Inflating the prices of both domestic and industrial commodities has a depreciating effect on the currency.
In buying, the costs of production and distribution are transferred to the final consumers. In order to protect buyers and the economy, regulations, and policies are set up by the government to “watch over” the market price to ensure a fair and equal transfer of these costs of production and distribution in order to avoid inflation in prices, which can cause the fall of the naira.
(4). Low economic growth:
The country has witnessed low economic growth for the past six years. Low economic growth is reflected in the country’s low income per head.
Low economic growth leads to low job creation, low wealth creation, and low resource distribution.
This limits the purchasing power and economic power of the majority of the population. When there is a low spending limit in a country, it devalues the currency and discourages investment.