Nigeria’s economy is largely dependent on oil exports, which account for almost 90% of all export revenue. As a result, changes in the price of oil globally have a big impact on the country’s foreign exchange market.
Nigeria generates more cash from exports when oil prices are high, boosting its foreign exchange reserves and strengthening the naira. On the other hand, when oil prices fall, the nation’s foreign exchange reserves decrease, which results in a weakening of the naira against the dollar.
Nigeria, the most populous country in Africa, has experienced various economic difficulties during the past 20 years. The shifting exchange rate between the US dollar (USD) and the Nigerian naira (NGN) is a significant element that has repeatedly impacted the country’s financial stability. All of that is likely to change as President Bola Tinubu emphasizes the necessity of a single exchange rate and a decrease in borrowing rates in order to increase investment in the nation.
In his inauguration address on Monday, Tinubu emphasized the need for the Central Bank of Nigeria (CBN) to move toward a single currency rate. Nigeria’s dollar bonds have increased in volume since that time. Bloomberg reported that the price of 2047-dated Eurobonds had increased 3.9% to 67.1 cents on the dollar. Debts maturing in 2049 increased by 3%, while those in 2051 increased by 4%.
Even though these are existing indicators of things to come, we look at how Nigeria’s economy might be impacted by the potential for a stronger naira.
Reducing Economic Challenges
Every time the CBN independently replaces dollar-denominated revenue with naira allocations, the naira declines. When this issue of a systemic naira surplus worsens, lower naira exchange rates will also develop. Alternatively, a stronger naira that exchanges at say N100 to $1, will unavoidably make it much easier to contain inflation.
As a result, the CBN won’t ever be forced to intentionally maintain disruptively high monetary policy rates that would otherwise result in borrowing costs for real sector investors thanks to the fear of inflation that is fed by an ongoing naira surplus.
In the long run, a stronger naira will promote productivity, with cheaper made-in-Nigeria goods and also more job prospects, as well as make local products more competitive versus those imports.
Specifically, a stronger naira will affect the following economic parameters:
The balance of trade between a country and its trading partners, including all payments for goods, services, interest, and dividends. The balance of trade deficit demonstrates that the nation borrows money from foreign sources to cover the deficit because it spends more on international trade than it brings in.
Or, to put it another way, the nation imports more foreign currency than it exports. As local goods and services become affordable enough for foreign customers and foreign assets become too expensive to produce revenue for domestic interests, the country’s exchange rate declines as a result of the excessive demand for foreign currency.
A stronger naira results in a decrease in excessive demand for foreign currency, which lowers the value of imported goods when compared to the naira. By creating the required demand in this manner, the naira is able to reduce the trade imbalance.
Better Trade Terms
Nigeria’s terms of trade will improve positively if the price of its exports rises faster than the price of its imports. The demand for the nation’s exports may increase if the naira appreciates. As a result, export revenues increase, which raises demand for the national currency and raises its value.
The value of the naira increases with respect to its trade partners as export prices increase. In this fashion, demands for trade are made in relation to the value of the naira.
Political Stability and Economic Performance
Inevitably, foreign investors look for secure regions with robust economies to place their money in. Investment capital will flee from other nations that are viewed as having greater political and economic risk in favor of Nigeria given its stronger naira.
Additionally, businesses and investors feel more secure when the naira is strong. For the naira to establish a stable business environment and support economic growth, a consistent and open policy framework is essential.