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Top 5 factors that affect Nigeria’s naira, exchange rate

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NairaWatch, Naira and Dollar

The Nigerian naira (NGN) is the official currency of the Federal Republic of Nigeria controlled by the Central Bank of Nigeria (CBN) to maintain price stability. 

Meanwhile, shortly after its inception in 1973, the currency began to experience devaluation. And in 2020, the country’s inflation had already stood at 14.23 percent leading to the current economic recession. 

The exchange rate movement from 1973 till date has shown that there exist a casual relationship between the exchange rate movements and macroeconomic aggregates like inflation, fiscal deficits, among others.

Suffice to state that when the inflation rate moved from 7.5 percent in 1990 to 57.2 percent and 72.8 percent respectively in 1993 and 1995, the exchange rate also moved from N8.04 to the dollar in 1990 to N22.05 and N81.65 to the dollar in the same period.

Also, when inflation rate dropped from 72.8 percent in 1995 to 29.3 percent and 8.5 percent in 1996 and 1997 respectively and raised to 10 percent in 1998, averaging 12.5 percent in 1999 to 2005, the exchange rate trended in the same direction.

As parts of our vision at Techeconomy.ng to analyse and write in-depth reports on both the positive and the negative sides of Nigerian economy and businesses, in this article, we will be pitching factors that have affected the legal tender and exchange rate. 

The exchange rate instability is a manifestation of economic volatility and other determinants of exchange rate include economic fundamentals like gross domestic products (GDP) growth rate, balance of payments position, external reserves, interest rate movements, external debt position, productivity, market psychology and expectations, socio-political factors, macroeconomic shocks and speculative contagion.

 

Happy reading as we unveil the five factors affect Nigeria’s naira and exchange rate

 

1. COVID-19 Pandemic

The number one factor that has affected Nigeria’s naira and exchange is the first wave of COVID-19 pandemic.

The COVID-19 pandemic outbreak caused by the transmission of severe acute respiratory syndrome was identified in December 2019 in Wuhan, China.

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The pandemic that spread like wildfire all over the world including the African Continent has claimed millions of lives.

Nigeria confirmed her first case of the pandemic on Thursday, February 27, making it the third African country to record the deadly disease at that time.

The pandemic which is one of the reasons for the country’s economic meltdown lasted for about eight months. Hence, naira and foreign exchange rate were afected. During this period, the economy was totally shutdown.

2. #EnDSARS Protests

The second factor that has affected Nigeria’s naira and foreign exchange was #EndSARS protests turned violence.

Recall that Nigerian youths recently took to the streets to demand that the country’s leaders disband the Special Anti-Robbery Squad (SARS) and reform the nation’s police force.

Barely two weeks after the peaceful protests began Nigerian economists and business managers spoke on the economic effect of the #ENDSARS protests across the country.

The financial experts disclosed that the businesses in the country lost at least N10 billion daily since the commencement of the protests.

However, the loss incurred by the country during the protests that lasted for about two weeks are believed to have been a minute of what was lost during the violence and aftermath.

3. Drop in Oil Prices

Initially, Nigeria’s economy was already weak due to the pandemic. The reason being that Nigeria is one of the oil producing countries in the world and fifth in Africa.

In 2006, Nigeria was regarded as an oil dominated economy as it generated over 70% of its income from the sale of crude oil proceeds.

And the highest highest crude oil export destinations from Nigeria according to reports from the NNPC are India, U.S., Canada, China, France, Italy, Indonesia, South Africa, Spain United Kingdom.

However, due to the COVID-19 as one of the reasons for Nigeria’s economic recession, the country’s average daily oil production recorded in the third quarter of 2020 stood at 1.67 million barrels per day (mbpd), or 0.37mbpd lower than the average production recorded in the same quarter of 2019 and 0.14mbpd lower than production volume recorded in the second quarter of 2020.

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The real growth for the oil sector was –13.89% (year-on-year) in Q3 2020, indicating a sharp contraction of –20.38% points relative to the rate recorded in the corresponding quarter of 2019.

On the other hands for the full year 2016, oil production was estimated to be 1.833mb/day, compared to 2.13mb/day in 2015. This reduction has largely been attributed to vandalism in the Niger Delta region. As a result, the sector contracted by -13.65%; a more significant decline than that in 2015 of -5.45%. This reduced the oil sectors share of real GDP to 8.42% in 2016, compared to 9.61% in 2015.

4. Drop in Gas and Electricity Supply

Nigeria’s gas supply to neighbouring West African Countries might have suffered another setback following the damage caused by a fire incident on the Escravos-Lagos Pipeline System which supplies gas from Escravos in the Niger Delta area to Lagos state.

The Nigerian National Petroleum Corporation (NNPC) recently reported that Escarvos to Lagos Pipeline was ruptured by an explosion along Egbokodo-Omadino, in Warri South Local Government Area of Delta State.

The incident came four days after the resumption of gas supply through the pipeline after the completion of repair work following a fire incident on it last week.

Reports have it that Ghana use to get about 25% of its power supply through gas from Nigeria, which flows through the pipeline via Benin, and Togo also received 120 million standard cubic feet of gas daily from Nigeria.

However, NBS in its report about Nigeria’s gas and electricity in 2016 and 2020 respectively, said the Electricity, Gas, Steam and Air conditioning Supply sector recorded a year on year growth of –0.01% in the third quarter of 2020.

This was –12.84% points lower than the 12.83% growth rate recorded in the corresponding quarter of 2019, and –8.65% points lower than the growth rate of 8.64% recorded in the quarter before. Quarter on quarter, the sector recorded a growth rate of –13.77% in Q3 2020.

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And for the 2016, the National Bureau said the sector declined by 5.16% in 2016 fourth quarter, which was 6.36% points lower than the corresponding period in 2015, and 1.51% points higher than in the third quarter of 2016, when the growth rate was –6.68%. Quarter-on-Quarter, the sector grew by 54.13%.

The contribution of Electricity, Gas, Steam and Air Conditioning Supply to real GDP in the fourth quarter of 2016 recorded as 0.49% minimally lower than the fourth quarter of 2015 at 0.5t1%, but higher than rate of 0.33% contributed in the third quarter of 2016.

In the third quarter of 2020, the sector contracted by –35.06% in nominal terms (year on year) as it sought to gradually recover from the restricted movements of passenger and goods.

5. Drop in Tax Remittance to the government

The businesses in Nigeria in year 2020 due to a lot of circumstances changed their orientation from profit making to survival of their capital.  

They are parts of revenue generation the pulse of the government but because of the economic meltdown little did they do.

The NBS reported that the sector’s contribution to the overall nominal GDP was 2.46% in Q3 2020, higher than the 2.40% it represented a year prior, but lower than the contribution of 3.76 % it made in the preceding quarter.

In real terms, growth in this sector was estimated at 3.21% during Q3 2020, or 2.14% points from the rate recorded in the third quarter, though down by –15.29% points from the rate recorded in the preceding quarter. Quarter on quarter growth in real terms stood at –25.24%.

According to the report, the growth of the sector in real terms was 2.68%, lower by 3.73% points from the rate recorded in the fourth quarter of 2015, and higher by 0.04% points from the rate recorded in the preceding quarter.

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