How Forex Impacts Trade in Nigeria
How does forex impact trade in Nigeria? This post provides a clear explanation to help you understand the hidden intricacies.
Nigeria’s economy has been in a slump in recent months. We can trace this to inflation, interest rates, public debt, and current account deficits. Nigeria’s inflation rate increased to 21.09 percent in October 2022, up from 15.92 percent the previous year. The volatile currency exchange rate, however, also has an impact on Nigeria’s economic problems.
What is Forex?
The term “Foreign Exchange” or “Forex” refers to a global market where currencies from different countries can be exchanged. The forex markets are often the biggest and most liquid asset markets in the world. This is because of the global nature of commerce, finance, and trade. Exchange rate pairs are used to compare currencies to one another and are deemed comparable. The value of the Nigerian naira has declined significantly during the past few years. This is more evident when you compare it to important currencies like the dollar and the pound.
The sale of foreign currency to Bureau de Change (BDC) operators was prohibited in 2021. Also, the Central Bank of Nigeria (CBN) stopped approving requests for licenses for Bureau De Changes. This monetary policy by the CBN was intended to bring stability and transparency to the forex market. With the exception of the fact that the supply and demand of Forex dictate prices and rarity. This appeared to be a way of reducing illegal subterranean domination of the market.
Why does this matter? Rarity increases an item’s worth. In other words, the ban on Forex market operators raises the demand for foreign currencies, favoring them over the Naira. The excessive demand for foreign currency drives down the value of the national currency. This happens until both domestic goods and services have competitive prices enough to attract international customers.
In foreign markets, a country’s exports are more expensive. On the other hand, its imports are less expensive when the currency has a higher value. It is reasonable to anticipate that a rising exchange rate will impair a nation’s trade balance.
High Exchange Rates on Trade
A major issue affecting the Nigerian economy and having a threefold impact on businesses is the unsettling exchange rate. To import commodities and raw materials because the naira’s weakening can no longer be controlled, many Nigerians need the dollar.
Increased exchange expenses
This is a problem for firms that conduct international trade. The reason is that they are required to pay exchange fees. These fees are similar to those associated with clearing products and other customs fees. In the end, it drives up the cost of goods and services.
Due to the rising cost of supply, several businesses have had to raise their pricing. Nigeria can only produce a limited amount. This is because of a lack of raw materials, hence the need for importation to increase output.
Due to Nigeria’s small amount of continuous production and its limited resource base, product quality has severely declined. Every player in the economy, from suppliers to producers to end consumers, suffers the impact of this chain of deficiencies. Raw materials that are of high quality and have reasonable prices are challenging for suppliers to supply. Producers have to raise the prices of commodities to cover the expenses of production.
As a result of these issues, businesses are experiencing poor patronage. Many consumers seek alternatives to high pricing. Examples include sachetization of things, providing demands on a scale of choice, and reducing quantities. If the CBN reduces onerous forex regulation and price-fixing of the nominal standard rate, demand and supply of dollars could really work to balance the market and trade activities.
Emmanuel Otori has over 9 years of experience working with 100 start-ups and SMEs across Nigeria. He has worked on the Growth and Employment (GEM) Project of the World Bank, GiZ, and Consulted for businesses at the Abuja Enterprise Agency, Novustack, Splitspot, and NITDA. He is the Chief Executive Officer at Abuja Data School.
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