Let It Be Weak

Global markets witnessed Nigeria announce its second announcement of devaluation of currency since 2015. In 2014-2015, the devalued Naira was at 198 per USD. While the picture painted by Emefiele was nothing short of ‘rosy’, Nigerian foreign exchange management strategies were anything but near efficient. The stalling of foreign exchange market operations,business and entrepreneurial adversities, and imminent recession because of unfavourable results of real estate, manufacturing and allied industries, have all made investors think twice about the economy’s future.

The years saw two significant manifestations – plunging oil prices, and political instability. Rampant currency turmoil and the necessity to promote growth had forced the government to introduce import restrictions, which seemed counterintuitiveat the juncture. After publishing the first quarter results that show evidence of imminent recession, currently nosediving oil production, and rising inflation mark the economic situation in Nigeria. Political mayhem in at the Exchange rate valuations have their beginnings in numerous economic factors, notwithstanding political indeterminate factors.

The Niger river delta is making things worse for the oil producing economy, slipping oil production to an almost three-decade low.Low oil production and low oil prices have burdened the Naira continuously, and there is a resultant imbalance between the need for foreign currency and maintenance of the exchange rate. Owing to such pressure, inflation in Nigeria is at asteep 13.7 percent.

However, Nigeria might be one of those economies (oil producing economy) whose currency devaluation may not be directly affected by plunging oil prices, and also one of those where oil prices did not plunge as much, relatively; the reason being that the currency is not pegged to the USD. The most significant affect of such fall in prices may be shown first-hand on its GDP, which is evident. A strengthening dollar, and a further devalued Naira may be one reason the oil exports would fetch more inflow of foreign exchange. Keeping a flexible currency exchange rate is perhaps one option that CBN has; allowing government intervention in order to create artificial demand for a major currency may not be an option for Nigeria. A devalued currency may create a higher rate of inflation in the short run; conversely, it may be useful in arriving at correct prices for non-oil products and services because of largely available supply of money. This would be in addition to increase in foreign exchange reserves.

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