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U.S Dollar outperforms naira amid Federal Government Moves

 

By Daniel Asikpo Jul 17, 2023

 

Nigeria is a country well known for its world influence in many activities. The most known blacks, the sixth most populous country in the world and Africa's Largest economy in GDP. 

 

 

Also positioning itself currently as the 31st largest economy in the world still in nominal GDP is home to over 220,000,000 people. 

 

The African giant still retains and man the position of producing Africa's Richest man for over a decade now which has been retained by the Nigerian business magnate Aliko Dangote. 

 

It is often a thing to worry about why Nigeria still remains a developing/emerging lower-income economy. 

 

There are many underlying factors to this current position which include; structural challenges, political instability, education human capital, corruption and governance, income inequality, population and economic size - though a large population can be an asset, it also presents significant challenges in terms of providing basic services, education, healthcare, and employment opportunities for its citizens. 

 

Despite having a relatively large economy, the GDP per capita in Nigeria is still very low.

 

GDP Overview

 

The Gross Domestic Product of Nigeria is currently at $440 billion. Nigeria's GDP per capita is relatively low compared to many developed countries. 

 

GDP per capita is a commonly used indicator to measure the average economic output per person in a country. 

 

According to the World Bank, The Gross Domestic Product per capita in Nigeria was last recorded at 2,449.59 US dollars in 2022.

 

Dollar to Naira Trail since 2012

 

As of 2012, the U.S. dollar to naira exchange rate was roughly $160 but has faced a consistent appreciation for the past 11 years. Many have cited it as a result of over-dependence on crude oil and the lack of Federal refineries. Let's look at some factors behind these drastic changes:

 

Interest rate: When there is an inflow of foreign investment, there is bound to be an increase in demand for dollars which in turn strengthens it against the naira. 

 

This is a result of higher interest rates in the United States which attracts foreign investors seeking high investment returns.

 

Trade Balance: "Not all the nation’s land borders have been re-opened" Acting controller-general of Nigeria's Customs Service Mr Wale Adeniyi said on Tuesday. 

 

If Nigeria has a trade deficit, meaning it imports more goods and services than it exports, there may be a higher demand for dollars to pay for those imports. This increased demand for dollars can put upward pressure on the exchange rate.

 

Inflation Differentials: While the inflation rate of the U.S. slowed to 3% in June, the National Bureau of Statistics (NBS) said Nigeria's annual inflation rose to 22.41% in May on a year-on-year basis from 22.22% in the previous month.

 

As the inflation rate in the United States is lower than that in Nigeria, it makes U.S. goods and services relatively cheaper compared to Nigerian goods and services. 

 

This can lead to increased demand for the dollar and contribute to its appreciation against the naira.

 

Economic and Political Factors: Investors are gradually losing confidence in Nigeria due to Economic and political instability, government policies, and geopolitical events which all influence exchange rates.

 

Positive economic indicators, favourable policies, or improved investor sentiment in the United States attract capital inflows, leading to a stronger dollar against the naira.

 

Supply and Demand: there is too much demand for dollars in Nigeria due to capital outflows, easy money laundering, extortion, and international transactions. If there is a higher demand for dollars relative to the supply of dollars in Nigeria, the value of the dollar will increase against the naira. 

 

Exchange rates are primarily determined by the forces of supply and demand in the foreign exchange market.

 

Subsidy and price floating

 

The Buhari government spent over N10 trillion on subsidies and is now using debt to finance payments due to the fact that oil sales no longer cover subsidies every month.

 

On May 29, 2023, the newly elected president Bola Ahmed Tinibu made a speech about removing the subsidy on petrol (PMS) which did take effect. 

 

According to Reuters, Nigeria's average daily petrol consumption has fallen by 28% since President Bola Tinubu scrapped a popular but costly subsidy on the fuel at the end of May, data from the industry regulator shows. 

 

Average daily petrol consumption fell to 48.43 million litres in June, down from the previous average of 66.9 million, according to figures released to Reuters by the Nigerian Midstream and Downstream Petroleum Regulatory Authority (NMDPRA)." The idea has been believed to tackle the naira dollar gap by taking the country out of unnecessary debts. 

 

Followed by naira price floating to meet standard pricing and end arbitrage in the market is the move made by the current government to tackle the gap in naira against the U.S. dollar. 

 

The price floating also comes at a cost as the naira is valued in the market at about N750 per dollar which many believe restricts economic growth or recovery and of course, it adds hardship to the citizens when inflationary pressure piles up.

 

The depreciated value makes Nigerian goods and services cheaper for international buyers. 

 

The question is 'Did the citizens cause the inflation? if not why must they suffer the negative outcome?

 

Many believe it will last only for a time and for the betterment of the nation, a strategy which the Nigerian government boasts it will certainly pay off. 

 

There has not been much of a positive change currently after this government moves.

Will this strategy pay off? will the government stay on course and how long are they willing to hold onto the thin wire? 

 

With so many factors to be made right, can we say the chances of the naira appreciating in value to meet at least N160 to $1 as we experienced more than years ago, will leave for time to unfold?