A former Deputy Governor of the Central Bank of Nigeria (CBN) and ex-presidential candidate, Pro. Kingsley Moghalu, has spoken about factors that affect the value of Naira.
Moghalu explained that the factors include the basic factor of supply and demand, saying if too much Naira is chasing scarce dollars, the dollar gets stronger relative to the Naira, and vice versa.
The CBN ex-deputy governor also noted that most important determinant of the value of the Naira is whether or not the Nigerian economy is productive and competitive in international trade.
According to him, “Others are inflation (a high inflation economy such as Nigeria’s weakens the value of the legal tender), high government indebtedness ( again, our case especially relative to our revenues and ability to pay which will be stretched the more we borrow on poor revenues, and 90 kobo out of every N1 goes to debt servicing).
“Speculation also affects the naira value, as there are currency traders around the world for whom the weakness of a currency is their very good fortune. Such traders “attack” such currencies for profit, especially where the currency is using a fixed, official exchange rate determined by the central bank instead of the market.
“That is to say, whether it has a diversified base of complex, value added products it exports and earns forex from those exports.
“I am not talking about diversification to cashew nuts and yam tubers. No. Those are primary commodities, not complex, value added ones that are the product of serious engineering and innovation.
“Since we obviously don’t have such an economy, our main FX earner is crude oil, which gives us 90% of our FX. Unfortunately, we don’t control the price of crude.
“Its pricing is volatile and unstable as a result of various international political and economic factors. This means that because we are essentially a one-product country, a one-trick pony, we are exposed to instability in our main income source.
“When the price of oil drops, and as the world innovates toward alternative energy sources, the amount of external reserves we have to back up the international value of our legal tender (our reserves) frequently comes under pressure. It’s those reserves, our main defense in a soccer analogy, that determines the value of the Naira.”