By Opeyemi Solaru
Over the past few years, the value of the Naira has decreased significantly. In 2015, the exchange rate was just shy of N200 to $1. The following year the exchange rate dropped to over N300 to $1. Last month, the CBN closed at N411 while the black market dropped a record low at N525.
Many that are not economics experts may wonder why Nigeria has more than one exchange rate — the bank rate, Nafex rate and the black market rate. Nigeria’s economy is heavily dependent on the exportation of crude oil, a whopping 90% of foreign exchange earnings. As the price of crude oil dropped drastically in 2014, the Nigerian exchange rate weakened.
To avoid devaluation of the naira, the government decided to implement one exchange rate for government transactions and another market-determined rate for exporters, travelers and small businesses. Additionally, the black market rate pegs the exchange rate at an additional 18% lower than the Nafex rate. This aimed to encourage the liquidity of dollars.
Last month, the Central Bank of Nigeria banned dollar sales to bureau de change (BDC) operators. CBN Governor Godwin Emefiele stated on a live TV broadcast that “This measure is not punitive on anyone, but it is to ensure the CBN is able to carry out its legitimate mandate of serving all Nigerians,” as the government was concerned that BDCs were extorting people.
By moving towards a single exchange rate, experts hope that foreign investors will be encouraged to increase investment. Currently, investors are not too confident about investing within Nigeria, as there is too much uncertainty surrounding the exchange rate and the legislative landscape.
This is truly a shame considering how appealing investment should be in a country with a population of 200 million and a $400 billion economy. However, with inflation, insecurity and the exchange rate, foreign investment will continue to suffer.
Small business owners also suffer the consequences of the rising exchange rate. There is a chain of unfortunate events, as the cost of living increases followed by an increase in the cost of doing business which is then passed on to the customer who may not be able to afford the goods or services anymore due to the aforementioned obstacles.
Although the Nigerian government has taken steps to “smoothen” the exchange rate, some expert economists fear that the decision will have a long-term negative impact on the economy and irreversible damage to businesses. However, even with a weak currency, Nigeria can increase exports to generate more foreign income in the country.