Nigeria foreign exchange market
Nigeria needs significant resources in order to meet its ambitious sustainable goals. While domestic financing sources such as tax revenues might be increasing they are not sufficient to fill in financial shortfall as as a result of the fall in oil prices. Which is the main source of government revenue.
The Nigerian economy is heavily dependent on the oil sector, which, accounts for over 95 percent of export earnings and about 40 percent of government revenues, according to the International Monetary Fund. According to the International Energy Agency, Nigeria produced about 2.53 million barrels per day, well below its oil production capacity of over 3 million barrels per day, in 2011.
Due to the shortfall in revenue, the Buhari governments is seeking funds from the international markets to complement domestic financing. External financing comes with huge risks, especially due to depreciation of local currencies with respect to the U.S. dollar.
Nigeria is currently experiencing loss of value in naira, meaning the Buhari Regime needs to raise more local currencies to pay back the country sovereign U.S. dollar-denominated debt.
The cost of debt repayment is stifling the growth of the Nigeria Economy. The Niger delta crisis, calls for Biafra and the slow wheel of change is not the best climate to attract huge foreign or encourage domestic investors. But there is hope, Nigeria GDP reached an all time high of 568.51 USD Billion in 2014. Presently it’s about 481 billion – source, worldbank.
How can Nigeria mitigate this foreign exchange risk?
DEVALUATION -There has been some talk of devaluating the Nigerian currency in order to restore equilibrium.
With Nigeria being a net importer, it is likely that this would simply make the situation worse and the exchange rate increase would cause imports to become more costly. It must be noted that a devaluation coupled with an increase in the quantity of exports to the point at which Nigeria became a net exporter would only have positive benefits for the economy. The price of Nigerian exports would fall; increasing competition and contributing positively to GDP.
REFINING CRUDE OIL – If Nigeria were to switch the focus to constructing enough oil refineries to produce a sufficient quantity of domestically produced petrol to make Nigeria petrol-self-sustainable, there would be no need for Nigeria to export crude oil, only to later re-import the refined form of the same product, as is currently the case.
INCREASE EXPORT – Diversify the country income stream, increase other export such as cocoa, oil seeds, wood, cooper, aluminium, etc
STABILITY – Political stability brings about economic growth. Investors feel confident to invest, the environment is conducive to business, reduces employment. Increase overall country GDP, meaning more revenue for the government.
As it stands, the solution that the Nigerian government have proposed to the FOREX issue is to adopt a ‘flexible FOREX policy’ whereby the government will undertake to officially institute, incorporate and recognise the black market, rather than allowing two parallel exchange markets to run. This would allow the government to better regulate the use of the limited foreign USD reserves, and undoubtedly provide a more suitable short-term solution.
The government must realise that resisting market forces is like trying to force a river to flow upwards. But others argue, devaluation is not the answer. Some form of currency control is required.