By Temilade Aderiye

According to Nairametrics (2022), on Wednesday, 14th September 2022, the exchange rate between the Nigerian naira and the US dollar on the black market fell to N707 per $1, a 0.28% depreciation compared to the N705 per $1 exchange rate recorded in a previous trading session. On the other hand, at the official Investors and Exporters (I&E) window, the exchange rate closed at N436.04 per $1 on Tuesday, 13th September 2022 which varies slightly from the N436.5 per $1 exchange rate that was recorded in the previous trading session. According to (2022), the naira has fallen to N427.95 per $1 as of 15th September 2022. This has been the situation between the naira and the dollar for the past couple of years with the naira experiencing sporadic bursts of appreciation before proceeding to fall before the dollar.

Investopedia (2022) defines the exchange rate as the “rate at which one currency will be exchanged for another currency and affects trade and the movement of money between countries.” According to Delawareinc (2022), the common determinants of the exchange rate between two currencies are the gross domestic product (GDP), economic activity, unemployment rate, and market interest rates in each of the countries. Exchange rates are also referred to as market exchange rates. Due to the round-the-clock nature of the foreign exchange, rates can change daily, every minute, or hourly with either small changes or large incremental shifts.

Exchange rates can either be fixed or floating. A fixed exchange rate is when two currencies are exchanged at the same price. It is the rate set by the Central Bank and recognized as the official exchange rate. On the other hand, floating exchange rates occur when the prices between two currencies changes based on demand and supply. It is a type of foreign exchange that continually changes. The Central Bank of Nigeria has been operating a float-based exchange rate system.

Before the colonial era, various items were used by different cultures as means of exchange. These items included beads, cowries, salt, and so on. According to (2022), which is the official website of the Central Bank of Nigeria, between the period of 1921 to 1959, the first set of banknotes and coins were issued by the West African Currency Board (WACB) in Ghana, the Gambia, Nigeria, and Sierra Leone. The establishment of Colonial Banks ushered in the Nigerian banking industry. This industry had the primary aim of fulfilling the commercial needs of the then colonial government. Nigeria’s banking system is controlled via the Central Bank of Nigeria, the apex bank which was established in July 1959.

Then, one pound was the highest denomination for banknotes while that of coins was one shilling. The WACB-issued currency was withdrawn on July 1, 1959, when the Central Bank of Nigeria (CBN) first started issuing Nigerian banknotes. On July 1, 1962, these banknotes were changed to show Nigeria’s republican status as the banknotes that were formerly inscribed with “Federation of Nigeria” were changed to “Federal Republic of Nigeria.”

As a result of the economic growth, the need for convenience, and the preference for cash transactions, a new banknote (#20 naira – twenty naira) was issued on February 11, 1977. It was the first Nigerian banknote to bear the image of a Nigerian citizen, that of the former Head of State, General Murtala Ramat Muhammed. And it was released as a tribute to him after his assassination in 1976. From July 1979 to December 2014, several changes were made to the Nigerian currency including a change in the colour of some of these currencies, the introduction of #100, #200, #500, and #1000 notes, and the change of all these currencies to the polymer substrate.

A country’s trading or commercial relationship with other nations is affected by the country’s exchange rate movement. This means that a country with a lower-valued currency would have more expensive imports and cheaper exports in foreign markets. While a country that has a higher-valued currency would have cheaper imports and more expensive exports. A country’s exchange rate portrays the state of that country’s economy. Thus, a country with a high exchange rate (compared to the currency of other countries) has a good economy, and the reverse is the case for a country with a low exchange rate.

Many factors determine a nation’s exchange rate. It is important to note that exchange rates are a comparison between the currencies of two countries. One of these factors is the differentials in inflation. A country with a continuously low inflation rate would have a rise in the value of its currency as it will have a higher purchasing power than other currencies. Countries with low inflation rates in the last half of the 20th century include Japan, Switzerland, and Germany.

While U.S. and Canada, on the other hand, had low inflation later in the century. Countries with a higher level of inflation usually experience a fall in the value of their currency compared to their trading partners’ currencies, which often results in higher interest rates. This is because when the prices of goods and services are overly increased or inflated, people (Nigerians) will not buy and would rather source for foreign alternatives. This does not in any way improve the exchange rate.

Another determining factor of the exchange rate is the differentials in interest rates. The terms inflation, exchange rates, and interest rates are all interwoven. The central bank controls exchange rates and inflation by manipulating and influencing interest rates. Changes in interest rates affect currency values and inflation. A higher interest rate provides lenders in an economy with a high return compared to other countries. Thus, foreign capital is attracted by higher interest rates, which causes a rise in the exchange rates. However, if the country’s inflation is higher than in other countries, the effect of higher interest rates is reduced. On the other hand, lower interest rates lead to low exchange rates.

A current account deficit is one other factor that determines the exchange rate. A current account is the record of a country’s transactions with other countries over a particular period which can be a year or a quarter of a year. It reflects all the payments for services, goods, dividends, and interests between two or more countries. A current account deficit occurs when a nation is spending more on non-indigenous or foreign trade than it is earning and is borrowing capital from other (foreign) sources to balance the deficit. When there is an excessive demand for foreign currency, it lowers the exchange rate of the country until foreigners can cheaply buy domestic goods and services, and foreign assets become too expensive to generate sales for domestic purposes.

The terms of trade can also determine a nation’s exchange rates. It has to do with the degree of difference between export and import price. A nation’s terms of trade improve if it has a very high export price compared to its imports. An increase in terms of trade implies a higher demand for the nation’s exports. And an increase in the demand for a nation’s exports also leads to an increase in the demand for the nation’s currency, and subsequently an increase in the value of the currency. However, if the export price is only a little higher than the import price, the currency’s value will decrease compared to that of the nation’s trading partners.

The most important thing to note is that the interplay between demand and supply is the main factor that determines the monetary value of a commodity or product. This implies that an increase in demand leads to an increase in supply which in turn leads to an increase in price. It also means that a decrease in supply can result in a price increase. Nigeria’s exchange rate has experienced fluctuations because it is undergoing two effects: the simultaneous fall in the supply of US dollars and a rise in the demand for US dollars.

According to the Nigerian Tribune newspaper (2022), between the period of 1980s and 1990s, it was rare for parents to send their wards abroad for primary or secondary education. However, today, the reverse is the case as many of the foreign exchange requests Nigerian banks attend are for primary and secondary school fees. According to the Central Bank of Nigeria’s Balance of Payments Statistics (a publicly available record), the sum of US$28.65 billion was spent on foreign education between 2010 and 2020. The Nigerian Tribune newspaper (2022) reports that Nigerians allegedly spend more than US$1 billion a year seeking medical treatment abroad and over the past ten years, have spent $11.01 billion on healthcare-related services.

In the past ten years, the foreign exchange demand for education and healthcare has been over US$40 billion. By the 1980s, the total amount spent on imports was US$16.65 billion per annum. And by 2014, the annual import bill had risen to US$67.05 billion. The number of products being imported has greatly increased and this has led to an increase in the number of dollars spent to buy and bring the imports into the country. Products like food, clothes, cars, and other appliances were being produced locally. However, with each passing decade, Nigerians have developed a fondness for foreign items and locally made products are perceived as inferior or bad. For example, in 1980, most of the vehicles on our roads were products of either Peugeot in Kaduna or Volkswagen in Lagos. But, nowadays, a large percentage of the vehicles we use are imported products.

Similarly, the clothes we wore were manufactured by Nigeria in textile mills at Kano, Funtua, and other cities. However, this has changed as many of the clothes we now wear are imported items.  All these demands (healthcare, education, excessive imports, and so on) cannot be gotten through the local currency. They require us to spend out of our dollar reserve, which leads to a reduction in the number of US dollars in circulation and subsequently, a rise in the exchange rate. And this is a great concern because the Central Bank of Nigeria (CBN) neither exports crude oil nor does it print US dollars if more suitable ways to increase its supply are not discovered and implemented.

This means that the tremendous rise in the demand for dollars has not had a consecutive rise in its supply. Between 1980 and 1996, Nigeria was able to achieve a balance between the number of imports and exports, with the number of exports topping that of imports. With this, the price of the US dollar (the exchange rate) did not rise (because the supply of dollars into the economy was more than its demand). Due to the “stable” exchange rate then, Nigeria’s economy experienced a boost.

However, the last years have been quite rough on the Nigerian economy. The daily profits from the sale of crude oil which serves as the major source of Nigeria’s foreign income and stands at over eighty percent of the nation’s dollar inflow have drastically fallen from US$93.89 billion to slightly higher than US$31billion in 2020. According to The Guardian newspaper (2022), the first recession in 2016 was triggered by the collapse of the global oil market, while the widespread covid-19 virus induced the second recession in 2020. The economic impact of the covid-19 virus and the fall in the price of crude oil prices negatively affected Nigeria’s major source of foreign exchange inflow.

Considering Nigeria’s heavy dependence on crude oil, the impact of the fall of its price to zero dollars per barrel in 2020 was quite severe on the country’s foreign exchange reserve, and economic growth. Because of increased demand, the ability of the Central Bank to effectively take part in the foreign exchange market was limited by the inadequate foreign exchange supply and this increased the pressure on the naira. This is a strong indicator that there has been a greater demand for dollars that has far exceeded its supply.

Asides from the fall in crude oil exports, another factor that has been negatively affecting the exchange rate is that there are increasingly more people interested in earning in dollars than naira. Over the last couple of years, many Nigerian men have relocated their families abroad in search of “greener pastures” while they stayed back in Nigeria to work. This means that even though they earn income in naira, their focus would be on earning dollars to support their families overseas.

Some of the efforts the federal government has made towards providing a solution to the exchange rate problem include: investing in the electricity value chain (to increase the supply of electricity), cotton farming to revive the textile industry, healthcare to reduce the rate at which people travel abroad for medical attention, and the agricultural industry to increase local food production. However, more viable and effective measures have to be put in place to completely even out the imbalance between the naira and the US dollar exchange rates.

Financial analysts have some suggestions that can help the Nigerian naira have more value over other currencies. One of these is the need to export more. To even out the unbalanced exchange rate between the naira and the dollar, there is a need to export more of the commodities produced locally. With this, there will be a bigger flow of dollars into the country, which causes it to lose value at the Central Bank and in the black market while causing the naira to have more value. It will equalize the exchange rate between the Nigerian naira and the dollars. This proves that the more locally produced commodities we export, the higher the chances of having an equal exchange rate between naira and dollar, leading to a stronger and more developed economy.

However, to achieve this, there is the need to have a stronger and more effective productive base. This will ensure that only commodities of high quality that can drive in investors (who will pay with dollars) will be exported. The focus should not only be on physical commodities. Services can also be “exported” to foreign countries. For example, we should equip our youths with more skills that will allow them to rank and scale on freelancing platforms like Upwork, Fiverr,, and others.

These skills include UI/UX design, software development, graphics design, content writing, digital marketing, and so on. These are all platforms that pay in dollars at hourly or weekly rates, depending on the agreement the two parties have. If more Nigerian youths are equipped with the necessary skills, they will be able to sign up on these platforms, get freelancing jobs, and get paid in foreign currency (dollars). This is an effective way to ensure the continuous circulation of dollars which can lead to a boost in the country’s economy and help to stabilize the nation’s exchange rate.

It is also important for the federal government to effectively manage the dollars available by prioritizing the need of traders or importers over requests for Personal Travel Allowance (PTA) or Business Travel Allowance (BTA) and people who travel overseas for medicals. According to Infomedia (2022), PTA and BTA are the foreign currency that the Central Bank of Nigeria allows Nigerians to buy at bank branches to meet their legitimate personal and business needs. The maximum amount for personal travel allowance is $4,000 per quarter, while that of business travel allowance is $5,000 per quarter.

These are the monies given to people who seek to spend foreign currency abroad, thereby boosting the economy of their country of destination. Rather than expending so much money on activities that will not help the Nigerian economy in any way, the government should focus on helping traders and importers. By giving them more foreign currency or reducing the deductions on the amount given to them, they will be able to import more goods into the country, which will lead to an improvement in the country’s economy.

However, measures have to be put in place to serve as a caution to the unruly elements who might want to take advantage of this opportunity to sell foreign currencies in black markets for personal profit. One such measure is the form M. Law Insider (2022) defines form M as “an application form used by clients to purchase foreign currency to fulfill foreign currency payment obligations in visible trades/transactions.” According to Exports-to-Nigeria (2015), an E-Form M (which is an electronic type of form M) is a mandatory documentation process put in place by the Federal Government of Nigeria through the Central Bank of Nigeria (CBN), and the Federal Ministry of Finance (FMF) to monitor goods that are imported into the country and enable the collection of import duties. This form is filled out by the traders or importers to ensure that they import the goods and pay the necessary dues.

Another way to solve the exchange rate problem is by reducing inflation. Nigerians have come to have a negative view of the term inflation. But it is a strategy that is beneficial for any government to implement. Investopedia (2022) defines inflation as a rise in price or the decline of purchasing power over time. Purchasing power is the number of goods or services that a unit of currency can buy at a particular time. Inflation is simply the process of increasing the price of goods and services, which translates to an increase in the demand for goods and services. Although this will inconvenience the citizens, it presents the government with economic benefits as there will be an increase in profits in both local and foreign markets.

However, this has to be done in moderation. When goods and services become too expensive, people will no longer buy. Considering the state of Nigeria’s economy, increasing the prices of goods and services would serve no use to the country. It might push Nigerians to seek cheaper foreign alternatives and chase off foreign investors or buyers. Nigeria’s economy is at the stage where more goods need to be produced for sale internationally. And it would be economically beneficial to the country if the goods are sold at cheaper prices than other competitors. This is a marketing strategy that is being implemented by China.

In all, swift steps need to be taken to level the playing ground between the Nigerian naira and the US dollars. The role of stabilizing the Nigerian exchange rate belongs to every Nigerian. Everyone must positively contribute to the growth of the economy by doing the right thing at the right time and in the right way. This is a collective responsibility that needs to be taken seriously to balance the exchange rate, ensure the growth of the economy, and improve the overall well-being of Nigerians.

September 16, 2022

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