The Naira Is Dropping! But Should You Panic?
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DISCLAIMER: I am not an Economist … I am just an Engineer.
If you are like me living in Nigeria, you are very worried about the dropping value of the Naira against the US dollar. People are worried, it has gone from 180 to 190 to 200 to 210 now…the Naira is just dropping
like its hot (21% over 180 days) , soon 1 dollar will be able to buy a Nigerian made car!
Now there are several alleged reasons for the dropping Naira, from Oil prices, non-diversification of Nigerian revenue sources, Boko Haram insecurity, a low foreign reserve and others.
With all that information thrown at you especially when you add the election fear factor in … it’s easy to panic!
But recently I started doing some research, and found that not only is the Euro dropping (18% over 180 days) against the dollar, but the Russian Ruble (72% over 180 days) is as well … that thing is dropping like gravity!
So back to the question, should Nigerians panic? I don’t think so …
Our Naira falling is largely due to Nigerians dependency on Oil (80% of our revenue comes from Oil) which is falling combined with the sudden rise of the US dollar and made worse by an Election fear that is accelerating the drop (more people in Nigeria want to buy dollars … thus demand and supply is kicking the Naira down).
Now based on my 10 year experience in the Oil industry I have never seen the price of Oil drop so fast … okay I take that back … it fell very fast in 2008 and the Naira value fell equally as fast (see graph comparison below). And one thing we know in the Oil industry is that the Oil prices always correct themselves, they eventually stabilize and it is already starting to happen.
Also unlike Venezuela who have refused to devalue their currency, the Nigerian Central Bank (CBN) has decided to deliberately devalue our Naira. Now this seems counter intuitive at first glance but after talking extensively with some Economic experts they explained how it makes sense. Per FinancialSense.com:
“A country with a cheaper currency will produce export goods which will be cheaper for foreign buyers, and the country will sell more exports. Most of the world’s central banks responded to the 2008 financial crisis with this very recipe — all using extremely loose monetary policy in an attempt to boost exports, raise inflation, and encourage growth.”
This is likely why we have not seen a sudden rise in the price of basic goods when compared to Venezuela who are forcing the Bolivar to stay at a value it should not be at and are now facing hyper inflation.
Thus it is my Engineering belief, that if the Elections conclude on February 14 March 28 without long term sustained violence and Oil prices start to stabilize (as is expected) across the world, then we would see our Naira appreciate to its correct value. But right now the election fear will keep artificially driving down the value of the Naira beyond the CBN devaluation … the sooner we have the Election the better it is for our Naira.
But again I am an Engineer…so don’t take my word for it…but you can definitely take my numbers.
Researched and Written By Okechukwu Ofili of ofilispeaks.com
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