By Toluwalope
In recent weeks the Nigerian naira fell against the Us dollar at an unprecedented rate of 400 Naira to a dollar, while the Central bank of Nigeria still maintained their rate at little below 200 Naira per dollar. Am sure you would ask yourselves why there is such a large difference between the CBN rate and the Parallel market rate?
Some have come up with a theory that it is because of the market forces of demand and supply, while others are saying that it is purposely being manipulated by a few who amass wealth from the falling naira. Let us now analyze this critically. Proponents of the demand and supply theory believe that the naira keeps on falling because of the lack of demand for the naira and the inability of Nigeria to generate sufficient dollars in exchange for her goods.
Crude oil is our major exporting product. Our medium term expenditure framework has over the past few years placed an emphasis on the oil sector as her greatest source of revenue to fund the expenditures set out in the Medium term expenditure framework. Although the Nigerian Government in her 2016 budget and medium term expenditure framework is seeking to diversify the economy by reducing her over-reliance on oil revenue and reducing the country’s exposure to oil price volatility. Non-oil revenue which includes corporate income tax, VAT, customs & excise duties, Federation levies and other sources of government revenue is estimated at NGN2.96trillion which represents 77% of the budgeted revenue of NGN 3.86trillion for 2016; an improvement from the previous year (2015) where revenue generated by the oil sector constituted 80% of total revenues, and revenues generated by the non-oil sector accounted for 20% of total revenues.
In previous years, the naira to dollar could maintain a price below NGN200 to a dollar because oil peaked at $114 per barrel in 2014 and in the early 2015 was still able to maintain a price of $62 per barrel. This meant that Nigeria was getting substantial foreign exchange from the sale of their crude oil. The normal process after selling crude oil is that the Central bank of Nigeria would take the foreign exchange received to the fx market and sell it to banks or BDC’s (Bureau d’ change) in exchange for the naira, thereby increasing the supply of dollars and increasing the demand for the naira.
As at February 2016, the price of the Brent crude is $35.29. This reduces the total revenue derived from the oil sector and in so doing the foreign exchange because as a member of OPEC (Oil producing exporting countries), Nigeria is given a daily production quota which must not be exceeded. This thereby makes it impossible for Nigeria to increase the total revenue derived from the oil sector by simply increasing her production and supply. Proponents of the oil sector argue that because Nigeria is import dependent and because the main source of Nigeria’s foreign exchange (oil) is on a decline, the Nigerian Naira has no choice but to weaken against the dollar. Apart from that, the dollar has also strengthened within the past decade. The monthly employment/ unemployment report by the Bureau of labor statistics shows the increase in jobs on a monthly basis, thereby depicting a thriving US economy.
Proponents of the Manipulation theory believe that the exchange rate is being manipulated, and it does not depict the true value of the naira. Dr Ifeanyi Ubah in a recent interview said he could ensure that the Naira appreciates against the dollar in just one month if consulted by the federal government of Nigeria. He even went as far as daring the federal government to seize his NGN 500 billion assets if he did not restore the naira. Barely 24 hours after the interview, the country’s currency tremendously boosted against the US dollar.
Before Ubah’s comment on Monday 22nd of February, the naira was quoted at N370, it however rose to 364 on Tuesday morning, closing trading hours around N340. As at the 26th of February, report says that it is now N290 to a dollar. Am sure you would begin to ask yourself that “hey, what happened to the market forces of demand and supply? Has the price of oil suddenly increased or has Nigeria started exporting another product in high demand?” The thing is that the market is either :
- Being manipulated by aboki’s seeking to exploit the market by profiting highly on the sale of their dollars since they are aware that commercial banks do not sell physical dollars to their Nigerian customers, by speculators demanding for more dollars with the hunch that it would rise later in future.
- Being inflated by fraudsters using Nigeria as a medium to carry out their fraudulent activities (this happens when scammers bring a large amount of foreign exchange derived from their fraudulent activities to Nigeria, they open domiciliary accounts or something, deposit the foreign exchange into their account and within a week or so after the bank would have already started trading with it, demand everything at to be transferred at once to their account abroad. These banks then use the naira to demand for dollars from their counterpart banks abroad, thereby raising the value of the dollar against the naira. This is all in a bid to mask their fraudulent activities because of the Lax financial security in Nigeria)
- The Nigerian government is trying very hard to sustain an unrealistic exchange rate by over supplying the market with dollars, which ends up digging into our foreign exchange reserves.
Recommended Readings
Andrea Roconcoroni, Gianluca Fusai., Mark Cummins., Handbook of multi commodity markets and products.
Robert F Aguilera., The price of oil.
