It is no longer news that the Naira has depreciated in recent weeks. This is the widest gap between the free market value and the Central Bank of Nigeria’s rate in Nigeria’s history. Who exactly is to blame for the abysmal performance of the Naira?
Many factors influence exchange rates. Differentials in inflation and interest rates, public debt, terms of trading and political stability are some of the exerting factors. High inflation and interest rates, large-scale deficit financing and decreasing terms of trade are all bound to make the Naira depreciate in value.
The recent depreciation of the naira is largely linked to the fall in the price of crude oil. The price is largely determined by the forces of demand and supply. The demand for crude has declined globally. The United States of America have become the largest producer of crude oil, hence cutting down import. Since the US market shut its doors to Nigerian crude, the Asian market has been our best bet. That has been recently threatened by Russian’s proposal to supply India, one of our major patronisers, with 10 million tons of crude oil in the next 10 years. The coming back of Iran to oil export will only drive oversupply. They have nearly 40 million barrels in offshore tanks for sale in 2016.The failure of OPEC to stabilise the market is largely seen as a major factor affecting oil prices. Saudi Arabia and its Gulf allies are not willing to cut down production. They are sceptical about losing their market share and indirectly benefitting their competitors. There is a perceived conspiracy theory with political undertone to it. A reduction in the supply of crude by Saudi Arabia and subsequent resumption of oil imports by the United States of America could benefit Russia and Iran which are perceived ‘enemies’. The availability and increased investment in alternative sources of fuel cannot be ruled out. Increased Shale oil production and a shift to renewable energy lend credence to this. These factors have significantly resulted in the fall in oil prices recently.
As a country, our demand for the dollar is absurd. We import virtually everything (despite our vast natural resources) and export little. Since the price of exports has risen by a smaller rate than that of our imports, the Naira has decreased in relation to its trading partners’ currency. Heightened demand for the dollar has increased its price since our oil is not yielding much as before.
The recent move by the Central Bank of Nigeria to ban import of basic commodities are worthy of note. However, these are temporary measures which are already fighting back. As matter of urgency,the Federal Government needs to be more proactive at this time of dwindling resources. The government has to be policy driven. Governance is a continuum and well-thought-after policies should transcend from one government to another. The administrative gap between the last administration and the current one left a detriment effect on the economy which resulted in the economic slowdown we are currently experiencing. The federal government cannot control oil prices nor influence its demand. The ongoing reforms in the oil sector would definitely pay off in the long run as long as the tempo is sustained. It will always be cheaper to refine our own crude. Saudi Arabia refines her crude at a cost price of $5 to $6 dollars per barrel. Refining our own crude oil will free Nigerians from the stronghold of oil marketers. It is within our power as a nation to be a manufacturing based economy. You cannot continue to import every raw material and remain competitive globally. Self-sustainable nations usually get it right when it comes to agriculture. Feeding ourselves would save billions of naira annually. The private sector has a part to play but that is largely dependent on the government creating an enabling environment. Meeting the power and infrastructural needs of the private sector will significantly reduce the cost price of goods and services available to the Nigerian people.
With the current oil price below $40 a barrel and with the International Monetary Fund projections of $20 for 2016, it is imperative we diversify the economy to keep afloat. More money will be available for meaningful development and ultimately the standard of living of Nigerians will improve.