• Tuesday, April 23, 2024
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Resolving Nigeria’s exchange rate crisis can curb high inflation

Dollar nears N1,500 as scarcity hits black market

In Nigeria, low exchange rates have pushed up the costs of imported consumables and raw materials, and have been a significant source of worry for both consumers and importers. The low exchange rate (currency depreciation) problem is one of the major causes of high inflation rate in Nigeria because the country imports a large volume of consumables and raw materials annually at higher prices.

A low exchange rate means a higher unit of local currency (naira) is exchanged for just a unit of the other country’s currency like the US dollar. A low exchange rate lowers the prices of exported goods and services but raises the prices of imported goods and services for consumers in the low-value currency country; this is the case in Nigeria.

The exchange rate depreciation expands the exportation of non-oil commodities by making exports cheaper than imports to reduce the importation of goods. When a country exports more products, it earns more foreign exchange and improves its trade balance. The devaluation of the Nigerian currency to improve exportation and reduce importation has not achieved the desired results because the anticipated non-oil commodity export is still struggling to satisfy the domestic market, let alone for export.

The sector of the Nigerian economy that suffers the most from the low exchange rate problem is trade. Nigeria is an import-dependent nation; a low exchange rate makes it highly vulnerable. In the first quarter of 2022, the total traded stood at N13 trillion; this amount was higher than the value recorded in the fourth quarter of 2021 (N11.71 trillion) and the value recorded in the corresponding period of 2021 stood at N7.86 trillion.

The total exports were N7.10 trillion, of which re-exports stood at N115.80 billion, while total imports stood at N5.90 trillion, according to the National Bureau of Statistics (NBS). The rising global prices and the naira depreciation problem have made imported goods more expensive and introduced high inflation in the domestic market.

The low exchange rate issue has heightened production costs in Nigeria beyond the reach of many producers. According to Tony Anakebe, managing director of Gold-Link Investment limited, about 80 percent of importers source forex from the parallel market due to their inability to source forex from the official market.

Manufacturers are finding it difficult to cope with the high cost of production. Segun Ajayi-Kadir, director-general of the Manufacturers Association of Nigeria, confirmed that the manufacturing sector was still battling for survival as its growth rate was not impressive due to the high cost of production. He stated that high prices in Nigeria were adversely affecting the profitability of the manufacturing sector and were partly responsible for its poor performance.

The retailing and wholesales sub-sector of the Nigerian economy has been affected by the low exchange rate problem challenging the economy. The importers of consumable products are also finding it difficult to stock their shops and warehouses optimally due to the high prices of imported commodities.

David Ogbalo, managing director of Ogbalo Sea Food, complained that they could hardly order half of the quantity of seafood they made in 2015 following the prevailing low exchange rate issue in Nigeria. The high cost of importing consumable products into the country has made the prices of both imported and local commodities rise.

The high youth unemployment in Nigeria is associated with the low exchange rate problem prevailing in the country. Manufacturers are struggling to survive the high cost of production. They are producing below optimal levels and reducing the employment of labour. The reduction in employment level has the full potential of affecting economic growth and worsening poverty in Nigeria.

Read also: How Nigeria can resolve exchange rate pressures – World Bank

The Nigerian economy needs structural transformation by granting low-interest loans to domestic firms to produce and expand the production of export-related products and lift trade restrictions on selected goods.

A large number of the youth should be motivated via agricultural loans to draft them to food production. Mechanised farming should be encouraged in Nigeria to boost food and raw material production for domestic consumption and industrial use respectively.

The government should introduce other monetary measures to manage the exchange rate in Nigeria for better economic performance. Also, the government should engage the services of qualified economic managers with clear records of results delivery to manage the economy. Resolving the low exchange rate problem in Nigeria can help curb high inflation, thereby resulting in a high economic growth rate.

Felix Ashakah is an economics lecturer at Western Delta University, Oghara.