The Sad Dollar Naira Relationship

The Dollar Naira Relationship

• The Dollar Naira exchange rate relationship is  a tale of the Naira depreciating against, the United States dollar from 1986 with the adoption of the flexible exchange rate regime.

The Dollar Naira is a currency pair that has a very lopsided relationship. And Nigerians in general suffer from the unequal union between the both currencies.

Just recently i had to fund my Forex account and i bought 100 dollar for forty thousand Naira, which is not funny at all. it is as if the financial gurus in the banking sector are doing nothing to reverse the trend.

Exchange rate fluctuation is seen as a general phenomenon around the globe which might have adverse effect on trade.

Exchange rate uncertainty is said to probably have a negative effect on international trade as bilateral trades are threatened with the risks involved.

Exchange rate volatility is a risk associated with unexpected changes in exchange rate, this is caused by some economic factors such as inflation rate, interest rate and balance of payments.

A country’s actual exchange rate deviation from an observable equilibrium is referred to as an exchange rate misalignment, a situation in which, when an exchange rate depreciates more than the equilibrium it is referred to as undervalued, and an appreciation of an exchange rate more than its equilibrium is referred to as overvalued.

The beginning of the generalized floating system in 1973 led to a high proportion of volatility and uncertainty of movements in exchange rate.

And both real and nominal exchange rates have fluctuated widely since the breakdown of the Bretton Woods system of fixed exchange rates.

The role of exchange rate in any economy is very significant as it directly and indirectly affects domestic price level, profitability of traded goods and services, allocation of resources and investment decisions.

Exchange rate movement and exchange rate uncertainty is an important factor which investors take into consideration in their decision to invest abroad.

The persistent depreciation in Naira exchange rate has led to a shortage of foreign exchange for the importation of the essential inputs for the industrial sector which has led to high costs of production in the country.

In less than 20 years Nigeria has had over ten exchange rate policies, some are reintroduced after being abolished, for instance the prevailing Dutch Auction System in the Nigerian foreign exchange rate market was first introduced in 1988 after the deregulation of the economy, abolished in the 1990s and reintroduced in 2007.

1. Relationship between oil trade and exchange rate

When it comes to countries like Nigeria with oil revenue as the center of the their economy, several studies have proven that there is strong correlation between changes in oil prices and exchange rate.

Nigeria benefits when there is an increase in the price of oil but also experiences a decline in the value of her currency against the US dollar due to the fact that the country is spending huge sum of money to import refined petroleum and other oil related products which are basically traded in US dollars. A fact that negatively affects the Dollar Naira relationship.

The Naira exchange rate has witnessed some period of relative calm since the Implementation of the structural adjustment programme (SAP) in July.

The naira which traded at N0.935 = 1.00USD in 1985 depreciated to N2.413 = 1.00USD and further to N7.901 against the US dollar in 1990. And currentlyfluctuates between 386 to 420 for a dollar in the first half of 2020.

For oil exporting countries all things being equal, an increase in the prices of oil should be considered positive while for oil importing countries should be considered as negative and vice versa if there is an abate in the prices of oil.

Nigeria relies heavily on the revenue from oil exports, but, at the same time extensively imports refined petroleum and other related products.

Nigeria relies heavily on the importation of required petroleum and its products for its oil consumption, the country’s domestic needs of oil are sourced from oil import which amounts for over 80%.

The drop in oil prices is currently mounting pressure on Nigeria to devalue the naira as decreasing export revenue depletes foreign-exchange reserves, limitimg the central bank’s ability to support the Nigerian currency.

According to Paris-based strategists at Societe Generale SA, Jason Daw and Phoenix Kalen, the central bank’s reserves has decreased by 20% in the past two years to the lowest since November 2017, and may soon reach the $30 billion threshold set by Governor Godwin Emefiele for the country to consider a devaluation.

According to SocGen strategists.  “The combination of a current-account deficit — previously due to strong imports but now being compounded by weak exports — portfolio outflows and lower oil prices will continue to deplete FX reserves and pressure the naira.”

The International Monetary Fund has already slashed the Nigeria’s economic growth projection to 2% from 2.5% because of a decline in oil prices.

2. THE DEPRECIATION OF THE NAIRA

To properly understand the Dollar Naira relationship and how it got to this stage. One must have to look back to how it all started, as a whole or in part.

It is important to note that the full strength of the Naira is tied to the foreign exchange earnings from crude oil exports. A reminder, in case that fact somehow eluded you while going through the above paragraphs. 

Crude oil dealings make up 95% percent of our country’s foreign exchange purse. 

While other sources of foreign exchange such as diaspora remittances and earnings from petroleum gases, agricultural exports, constitute less than 5% of the entire foreign currency reserve.

A number of factors have contributed to the dwindling fortunes of the naira in all the foreign exchange markets. Some of them are fundamental while others are secondary. The fundamental factors emanate from structural imbalances relating to:

Weak production base and undiversified nature of the economy Import-dependent production structure.

 Fragile export base and weak non-oil export earnings. Fiscal imbalances and accommodating monetary policy or expansionary fiscal and monetary policies.

The other factors include: Sluggish foreign capital inflow. Phenomenon of excess demand for foreign exchange in relation to supply.

Instability of earnings from crude oil, upon which the economy
depends very heavily.

Unguided trade liberalization policy, speculative activities and
sharp practices of authorized foreign exchange dealers, for example, round tripping in the foreign exchange market.

(BOP) position. The capital account of the BOP has in the past
experienced significant pressures with deficits rising from 8.6 per cent of GDP in 2000 to 11.6 per cent in 2002. The overall balance declined from a positive balance of 6.9 per cent of GDP to a negative balance of 10.5 per cent in the same period.

Huge BOP deficits engender pressures on the Naira exchange
rate and Capital flight. This not only engenders a loss of productive
resources to the country, but also has destabilizing effects on
domestic macro economic variables including the exchange rate.

Specifically, the huge depreciation in most of the years of the first half of the 2000s were attributed to additional factors such as:

• Excess liquidity in the system induced by the transfer of
  government accounts from the Central Bank of Nigeria to
  commercial banks and the huge extra budgetary spending of 1999 on unproductive activities; excess liquidity in the  economy has also not been helped by the need for the CBN to accommodate the fiscal operations of the government.
• The release in the first quarter of year 2001 of N198 billion excess crude oil revenue to various tiers of government, besides their various huge development budgets and
• Speculative demand for foreign exchange stemming from uncertainties created by social and political unrest, expectations of future depreciation of the naira as the currency weakens, as well as the deterioration of the external
  sector position.

The exchange rate of the naira depreciated against the major intervention currency, the United States dollar from 1986 with the
adoption of the flexible exchange rate regime.

It further depreciated to N17.30 and N22.05 = US$1.00 in 1992 and 1993, respectively. In 1994 the exchange rate of the naira was fixed at N21.8861 = US$1.00.

But the fixed rate could not stand and so depreciated from the fixed rate of N21.8861 per dollar in 1994 to a high of N82.33 = US$1.00 in 1995, depreciated further to N84.38 = US$1.00 and N92.65 = US$1.00 in 1998 and 1999, respectively.

The average exchange rate at N111.90 = US$1.00 for 2001 depreciated to N128.75 during the period 2002-2005. 

3. Dollar Naira Exchange Rates 2020

The Dollar Naira  exchange rate is thus:

Minimum: 361.29 NGN

Maximum: 391.64 NGN

Average: 378.05 NGN

Sources: 1, 2, 3, 4, 5,