The mismatch between demand and supply of foreign exchange is a core factor affecting the exchange rate of the Naira.
This is according to a presentation on “How to stabilise the naira” made by the Chief Executive Officer, Economic Associates, Dr Ayo Teriba.
Dr Teriba made a connection between exchange rate stabilization and core economic principles, stating that a solution without reference to the forces of demand and supply is merely chasing shadows.
What he is saying
He said, “The exchange rate is a mere indicator of the balance of supply and demand forces in the foreign exchange market.
“Those who are discussing exchange rate developments without reference to the unfolding realities of demand and supply are chasing the shadows instead of substance.”
The recent drops in the official naira exchange rate and the significant expansion of the parallel market premium, he added, signalled that the uncertainty in the Nigerian foreign exchange market had escalated, putting the country’s ability to stabilize the naira to the test.
The current currency rate issue, he claims, was sparked by forex supply shortages in the aftermath of the pandemic-induced global lockdown in 2020.
Teriba quoted figures from the 2020 statistical bulletin of the Central Bank of Nigeria. He said, “Nigeria’s annual average net goods exports inflow of $34bn from 2005 to 2014 had dropped to an annual average inflow of $5.9bn from 2015 to 2019, before dipping steeply into the steep net outflow of -$16.4bn in 2020 (that was a $50bn shortfall relative to the 2005-2014 average) and it is likely to remain a net outflow in 2021.
“Balances on Nigeria’s trade in services and incomes have historically been negative. Remittances are now the only source of net inflow on Nigeria’s current account, with an annual average inflow of $21bn from 2005 to 2020.
“This was not large enough to offset deficits from goods, services, and income, leaving the current account in a steep deficit of -$16.98bn in 2020.”
According to him, general developments in external trade and payment conditions, which have lowered net forex inflows into Nigeria and other countries, have influenced overall forex supply conditions. He stated also that supply was based on the government’s capacity to boost the sizes of net-inflows from targeted components of the current and capital accounts, especially in the face of pandemic-related downswings in global economic conditions that helped some countries blunt the edges of adverse generic shocks.
