Recently, the Naira has been gaining much value over the dollar, making people wonder about the moves and the policy that the federal government and the central bank have made that have led to this massive gain in the value of the Naira over the dollar.We already know that this can be caused by the combination of domestic economic reforms in our country, Nigeria, and the broader global financial trends. In this article, I will be giving all the detailed factors that are behind these changes and how they can affect the economy of Nigeria.
WHAT ARE THE FACTORS CONTRIBUTING TO THE NAIRA’S APPRECIATION OVER DOLLAR?
Central Bank of Nigeria (CBN) Policy.The Central Bank of Nigeria has introduced several policy measures to stabilize and strengthen the naira; these measures include.
- The central bank of Nigeria has cleared the FX backlogs. It has cleared $1.5 billion in outstanding foreign exchange obligations. This move helps to ensure smoother operations in the market and made the naira gain value over the dollar.
- The central bank of Nigeria has improved the FX market’s transparency by eliminating speculative practices and limiting excessive foreign currency exposure in Nigerian banks. Bureau de change operators are being followed up with strict rules and guidelines to make Naira gain some value.
- The CBN banned Binance in Nigeria, which made Nigerians question their act. But CBN did it to stop the trading of naira as a stablecoin due to their exchange rate manipulations.
- So far, Nigeria has become an attractive destination for foreign investors seeking high yields. This is due to the treasury bills offering an accommodating interest rate of over 21.5%, making investors come to Nigeria with foreign currencies demanding Naira. This will cause an increase in the demand for Naira, thereby making the Naira gain more value.
- Some Nigerians who are in different parts of the world, especially in the United States, are coming back to Nigeria with different currencies, especially the US dollar. They all need to convert their dollars to Naira. This will make high demands of naira to increase, thereby increasing the value of naira over the dollar.
- CBN has restricted the use of dollars to purchase certain things. For instance, the payment of foreign school fees in dollars. This act is to reduce the excessive demands of dollars.
WHAT ARE THE FACTORS DRIVING THE DOLLAR DOWN?
While the naira benefits from domestic policy reforms, the U.S. dollar is currently facing some challenges on the global stage.
- Recently, the Federal Reserve is making some policies to reduce interest rate hikes, which have possibly made the dollar weaker.
- The United States is experiencing some economic slowdown; this slowdown will catalyze a cutdown of interest rates, which is making the dollar weaker against the naira.
WHAT WILL BE THE EFFECTS OF NAIRA APPRECIATION ON THE NIGERIAN ECONOMY?
POSITIVE EFFECTS:
- Now that the naira is competitively stronger than the US dollar, the importation of goods will be cheaper, potentially reducing the inflationary pressure.
- This shows some stability in Naira, which will likely attract investors to Nigeria for investment.
NEGATIVE EFFECTS
Nigeria is battling with back-to-back inflation. As the naira gained value over dollars, the Nigerians won’t feel it due to the high inflation rate.
CONCLUSION
The strengthening of the naira and the decline of the dollar show the unpredictable nature of the currency market and the Forex industry at large. Showing that changes in the global economy always have some effect on the dollar, while in our country, Nigeria, these developments show a bold step towards our economic stability and development.Understanding these basic factors plays a good role in helping traders and investors to have a better understanding of how to navigate the Forex space and also take advantage of any period of economic challenges.