Nigeria’s local currency is taking a beating with rates for the dollar at the autonomous market heading close to N500 but it should be the case that given the fundamentals of the economy the Naira should indeed be appreciating.
Usually in Nigeria, calls for a weakening of the local currency get louder but here are five reasons in support of a stronger Naira.
Firstly, the price of oil is rising and has been so for many months. Brent crude, the global benchmark which mirrors Nigeria’s main crude grade, is trading above $70 a barrel and holding at that level for a second day running.
Secondly, `Nigeria’s oil production level is also going up.
Thirdly, the country’s balance of trade has improved considerably, and the prospects are even brighter.
Fourthly, Nigeria’s current account deficit has shrunk from $12 billion to a mere $2bn.
And finally, the terms of trade of Africa’s most populous nation are also improving.
While some analysts now say the purchasing power parity for the Naira should be somewhere around N470 to the green back, yet some others with a more balanced or nuanced position on the Naira say there are some weighty counterbalancing forces.
They include lag in receipts, damage to the Nigerian economy from the recession and there is also the view that the Naira is currently troubled by panic and speculative buying.
According to one senior economist in government,
“I think that the narrative could be more balanced and nuanced. “Regarding to the points raised above in favour of a higher Naira value, there is in addition the significant improvements we have seen in remittance inflows (from $6 million per week in early December to over $45 million per week now). But all these seem to be related to only one side of the equation for exchange rate determination, namely the supply side.
“Whilst they are all true and could be a harbinger for a strengthening of the Naira, it is entirely possible (and probably currently the case) that the demand side of the equation may negate any effects from the highlighted supply side developments.
“As the global economy has reopened gradually, travels have somewhat improved, import pressures have risen, and so has payments related to foreign education. It appears also that speculative FX demand may be on the rise.
“Whether the combined effects of these demand and supply developments amount to an expected appreciation of the Naira remain to be determined. But one can make the argument that the supply side effects are more permanent/durable and may have an upper hand in the equation.“
