Let me try and explain.
The Nigerian economy (like any other economy) is completely dependent on trade.
What is trade? It is the buying and selling of goods and services in exchange for value (money).
In simple terms, there are 2 kinds of trade. Internal and external trade.
The Nigerian economy (like any other economy) is completely dependent on trade.
What is trade? It is the buying and selling of goods and services in exchange for value (money).
In simple terms, there are 2 kinds of trade. Internal and external trade.
Internal trade is the buying and selling within the borders of Nigeria, while external trade is what takes place across the boundaries of Nigeria (ie import and export)
Because of Nigeria's highly undeveloped state, we import most of what we consume while we export mostly oil
Because of Nigeria's highly undeveloped state, we import most of what we consume while we export mostly oil
This means that in order to pay for most of what we consume in Nigeria (which is imported), we need to sell what we have that is valuable to the outside world (which is mostly unrefined crude oil)
The mechanism we use to pay for everything we buy and sell externally is known as our foreign reserves.
When we sell oil, or resecieve loans, grants or any other foreign currency, it goes into our reserves.
The CBN is the manager of the reserves.
When we sell oil, or resecieve loans, grants or any other foreign currency, it goes into our reserves.
The CBN is the manager of the reserves.
When we need to pay foreigners (either for imports, loan repayments, etc) we do so from our foreign reserves.
The CBN publishes the value of our reserves periodically in order to reassure our international partners that we are able to meet up with our obligations as and when due
The CBN publishes the value of our reserves periodically in order to reassure our international partners that we are able to meet up with our obligations as and when due
When the CBN stops making such regular public declarations, or when it is clear that the reserves have gone below certain threshold, demand for foreign exchange starts to skyrocket
Why?
This means there'll be general doubt that the country can meet up with its trade obligations
Why?
This means there'll be general doubt that the country can meet up with its trade obligations
When demand for forex goes up, the exchange rate also goes in the same direction.
Even when the CBN tries to conduct its own business with a fixed exchange rate, the real value of forex can easily be tracked on the blackmarket.
Rapidly rising exchange rates will also lead to
Even when the CBN tries to conduct its own business with a fixed exchange rate, the real value of forex can easily be tracked on the blackmarket.
Rapidly rising exchange rates will also lead to
more demand for forex, which results in a vicious cycle with the country's currency as the loser.
At some point the country is unable to trade because it cannot meet its foreign currency demands.
This starts to affect the economy and eventually leads to recession.
At some point the country is unable to trade because it cannot meet its foreign currency demands.
This starts to affect the economy and eventually leads to recession.
The only way to rectify the problem in such an instance is to devalue the currency
Devaluation means that CBN officially adjusts the exchange rate with which it trades the nation's currency
This means that a unit of forex will then cost more to purchase in local currency.
Devaluation means that CBN officially adjusts the exchange rate with which it trades the nation's currency
This means that a unit of forex will then cost more to purchase in local currency.
Devaluation affects the economy in different ways.
If you are selling your goods or services to international buyers, it means that your products will be cheaper and therefore more competitive
Buyers will prefer to trade with you because you have suddenly become more affordable
If you are selling your goods or services to international buyers, it means that your products will be cheaper and therefore more competitive
Buyers will prefer to trade with you because you have suddenly become more affordable
Buy if you don't produce anything of value, or if your major export was never priced in local currency, nothing changes in how the international market perceives you.
On the other hand, everything you buy from abroad (ie imports) becomes more expensive.
On the other hand, everything you buy from abroad (ie imports) becomes more expensive.
Foreign loans become a double edged sword in this situation because they've become more expensive to repay, while your country's economy is now in a recession that makes recovering the loan more difficult
This narration of events was exactly what happened to Nigeria in 2015/16
This narration of events was exactly what happened to Nigeria in 2015/16
Forex reserves were at below $26b which told the whole world that Nigeria had less than 6 months worth of funds to settle its obligations.
Oil prices were approaching $20 a barrel (from $65) & currency speculators globally began betting that Nigeria would devalue its currency.
Oil prices were approaching $20 a barrel (from $65) & currency speculators globally began betting that Nigeria would devalue its currency.
Demand for dollars in Nigeria began to explode & genuine manufacturers were unable to access currency to maintain production
This led to a recession and large scale job losses
It took the devaluation & a strict policy of import restrictions to bring the situation under control
This led to a recession and large scale job losses
It took the devaluation & a strict policy of import restrictions to bring the situation under control
This gave rise to the govt's policy of developing home grown sufficiency in food production, and it wasn't a surprise that the FG invested heavily in agriculture
