How Falling Oil Prices Caused Foreign Exchange Rate Movement in Nigeria ARTICLE.
By Frances Coppola.
Since 2014, oil prices have fallen by well over 50 percent, from $115 per barrel in June 2014 to under $50 per barrel. 1 For many countries, this has brought a welcome boost to their economies as consumers and businesses have benefited from lower fuel and energy prices. But for some oil producing countries, falling oil prices have been disastrous, bringing rapid foreign exchange rate falls and affecting government and private sector finances. Few have been harder hit than Nigeria.
Dependence on oil production creates economic fragility.
Nigeria’s principal export is oil. In fact, oil is almost all it exports. Despite worsening terms of trade, oil production still contributes over 10% of Nigeria’s GDP. 2 Nigeria is dependent upon imports of essential foodstuffs and raw materials. It is even dependent on gasoline imports, since it produces no refined petroleum products itself. Nigeria’s economy is a clear example of what is known as “Dutch disease. ”.
As defined by the Financial Times’s Lexicon, “Dutch disease is the negative impact on an economy of anything that gives rise to a sharp inflow of foreign currency, such as the discovery of large oil reserves. The currency inflows lead to currency appreciation, making the country’s other products less price competitive on the export market. It also leads to higher levels of cheap imports and can lead to deindustrialisation as industries apart from resource exploitation are moved to cheaper locations. ” 3.
During the boom years of oil production, US dollars flowed into Nigeria, causing the foreign exchange rate of its currency, the naira (NGN), to rise versus the US dollar and enabling the country to accumulate billions of US dollars as foreign exchange (FX) reserves. The rising dollar exchange rate attracted imports and made non-oil exports uncompetitive, while the oil revenues discouraged other forms of production. As long as the oil price remained high, Nigeria was a rich country. But once it began to fall, the underlying fragility of the economy became apparent.
Manipulating currency exchange rate has repercussions.
The price of oil started to fall in mid-2014, as demand from Asia slowed and American shale oil production increased. Like most other oil producing nations, Nigeria initially responded by allowing its foreign exchange rate to depreciate versus the dollar, protecting the country’s FX reserves but risking inflation. But in March 2015, Nigeria’s central bank decided that the risk of inflation from allowing the naira’s foreign exchange rate to fall was too great. The naira was pegged to the US dollar at around 198 to one. And there it remained for over a year.
Pegging the naira to the US dollar did not prevent inflation, as the central bank had hoped. Price inflation – already high at around 8 percent in mid-2014 – rose despite the peg, reaching 16.4 percent by June 2016. 4 This was due to the growth of an unofficial USD-NGN FX market. The unofficial rate soared, pushing up prices in Nigeria’s import-dependent economy.
Meanwhile, maintaining the peg was fast burning through the country’s US dollar reserves. In an attempt to stem the outflow, the central bank restricted the availability of US dollars to “strategic imports” only, starving businesses of essential hard currency and deterring much-needed inward investment. In the first quarter of 2016, the economy went into recession, amid rising unemployment and growing shortages of essential goods and fuel due to the US dollar shortage.
Averting a foreign exchange crisis.
Despite the central bank’s restrictions, US dollars continued to drain out of the country as the official and unofficial US dollar foreign exchange rates diverged. 5 By June 2016, the unofficial currency exchange rate was well over 300 NGN to the US dollar and Nigeria’s reserves had fallen to $26.5bn, sufficient for less than five months of imports. 6 The spectre of a foreign exchange crisis and an IMF rescue began to loom.
On June 20, 2016, the Nigerian central bank abruptly floated the currency. The naira’s currency exchange rate versus the US dollar promptly collapsed to around 282. The central bank soft-pegged it at 282-285 for the next month, but the reserve drain to maintain this proved unsustainable: in July, the central bank stopped supporting the currency. On July 28, the US dollar exchange rate dropped to a record-low of 322 NGN. It had fallen by 14.2 percent in one month and 61.8 percent in annual terms. 7.
Rapid currency exchange rate depreciation can be painful. In July 2016, high inflation forced Nigeria’s central bank to raise interest rates to an unprecedented 14 percent. 8 For an economy already in recession, this was very bitter medicine.
The takeaway.
When a country is experiencing FX outflows, for example because it is an oil producer and the oil price is falling, its foreign exchange rate naturally falls. If the central bank tries to prevent the currency exchange rate from falling, the country’s FX reserves may gradually be depleted: if the country imports more than it exports, and is unable to pay for imports in its own currency, it can conceivably run out of money.
Nigeria was facing such a crisis until it allowed its currency exchange rate to float against the US dollar. It is not yet out of trouble: its FX reserves are very low, it has high inflation and its economy is in recession. 9 Now the question is whether Nigeria has created an opportunity to supplement its dependence on oil production by developing a well-diversified, sustainable economy for the future.
The Author.
With 17 years experience in the financial industry, Frances is a highly regarded writer and speaker on banking, finance and economics. She writes regularly for the Financial Times, Forbes and a range of financial industry publications. Her writing has featured in The Economist, the New York Times and the Wall Street Journal. She is a frequent commentator on TV, radio and online news media including the BBC and RT TV.
Related Links.
Popular Articles.
Related Articles.
Butterfly Spreads and Exchange Rate Risk.
Forex Knowhow: What Are Futures and Options?
What is FX Hedging? Rolling Hedges and Short Hedges.
Make International Payments.
Existing FX International Payments customers log in here.
Article(s) on this website that are identified as being prepared by third parties are made available to you for information purposes only. These third party articles do not represent the opinions, views or analysis of American Express and American Express does not make any representations as to their accuracy or completeness. If you have questions about the matters discussed in those articles, please consult your own legal, tax and financial advisors.
Contact Us 1 888 391 9971.
Products & Services Credit Cards Small Business Credit Cards Corporate Cards Prepaid Cards Savings Accounts and CDs Gift Cards.
Links You May Like Membership Rewards ® Mobile & Tablet Apps CreditSecure® Serve ® Bluebird ® Accept Amex Cards Refer a Friend.
All users of our online services subject to Privacy Statement and agree to be bound by Terms of Service. Please review.
© 2017 American Express Company. All rights reserved.
The World's Trusted Currency Authority.
1 NGN to USD Quick Look.
XE Market Analysis.
North American Edition.
The dollar has traded on a softer tack into the U. S. tax bill votes, although most pairings remained within their respective ranges that were posted yesterday. AUD-USD was an exception, lifting to a two-session peak of 0.7684. EUR-USD lifted back . Read More ▶
European Edition.
Narrow ranges have been prevailing, and more of the same looks likely, though there could be some chop around data releases and news developments, with moves prone to be exaggerated by thin market conditions. All the dollar pairings we track are . Read More ▶
Asian Edition.
The dollar was relatively steady through the morning session, though ahead of the U. S. House vote on the tax reform bill, USD sellers stepped in, taking major dollar pairing to near session lows. EUR-USD rallied from early lows of 1.1805 to print . Read More ▶
XE Live Exchange Rates.
Did you know?
XE Currency Tools.
NGN - Nigerian Naira.
Our currency rankings show that the most popular Nigeria Naira exchange rate is the USD to NGN rate. The currency code for Nairas is NGN, and the currency symbol is ₦.
USD - US Dollar.
Our currency rankings show that the most popular United States Dollar exchange rate is the USD to EUR rate. The currency code for Dollars is USD, and the currency symbol is $.
Popular Currency Profiles.
Get an XE account.
Access premium XE Services like Rate Alerts. Learn more ▶
NGN - Nigerian Naira.
The Nigerian Naira is the currency of Nigeria. Our currency rankings show that the most popular Nigeria Naira exchange rate is the USD to NGN rate. The currency code for Nairas is NGN, and the currency symbol is ₦. Below, you'll find Nigerian Naira rates and a currency converter. You can also subscribe to our currency newsletters with daily rates and analysis, read the XE Currency Blog, or take NGN rates on the go with our XE Currency Apps and website.
Top NGN Exchange Rates.
Currency Facts.
Freq Used: ₦1, ₦2, 50.
Freq Used: ₦5, ₦10, ₦20, ₦50, ₦100, ₦200, ₦500, ₦1000.
Central Bank of Nigeria.
Have more info about the Nigerian Naira?
XE Currency Converter.
Why are you interested in the NGN?
Central Bank Rates.
Popular Currency Profiles.
Get an XE account.
Access premium XE Services like Rate Alerts. Learn more ▶
Exchange Rate in Nigeria.
Nigeria - Exchange Rate.
Naira depreciates drastically following scrapping of currency peg in June.
The naira has been weakening against the U. S. dollar since June when the Central Bank scrapped the currency peg that had kept it at an artificially-high value of around 198 NGN per USD for over a year. Directly after the peg was abandoned on 20 June, the currency lost over 40% of its value against the USD and fell to 282 NGN per USD. While the Central Bank had pledged to move to a free-floating exchange regime, it intervened in the foreign exchange market in the weeks after the devaluation to keep the naira within a narrow range of 282 to 285 NGN per USD. In mid-July, the Bank reduced its interventions, causing the naira to depreciate further. On 28 July the currency fell to a record-low of 322 NGN per USD, which marked a 14.2% depreciation over the same day in June and a 61.8% depreciation in annual terms. Since then, the naira has been fluctuating at low levels. On 18 August it traded at 321 NGN per USD.
FocusEconomics Consensus Forecast panelists expect the naira to trade at 291 per USD at the end of 2016. For 2017, the panel foresees the NGN trading at 306 per USD.
Nigeria - Exchange Rate Data.
Sample Report.
5 years of economic forecasts for more than 30 economic indicators.
Nigeria Exchange Rate Chart.
Nigeria Facts.
Sample Report.
Get a sample report showing all the data and analysis covered in our Regional, Country and Commodities reports.
Start Your Free Trial.
Start working with the reports used by the world’s major financial institutions, multinational enterprises & government agencies now. Click on the button below to get started.
Economic News.
Nigeria: PMI signals healthy momentum in November.
December 5, 2017.
The Stanbic IBTC Bank Nigeria Purchasing Managers’ Index (PMI) lost ground in November, although still recorded a strong reading overall.
Nigeria: Recovery strengthens in Q3 on higher oil production.
November 22, 2017.
Nigeria’s economy gained traction in the third quarter, after growing for the first time in over a year in Q2.
Nigeria: Central Bank holds policy rate at over decade high in November.
November 21, 2017.
At its 20–21 November monetary policy meeting, the Monetary Policy Committee (MPC) of the Central Bank of Nigeria (CBN) decided to leave the monetary policy rate and all other monetary policy parameters unchanged, meeting market expectations.
Nigeria: Inflation inches down in October.
November 15, 2017.
In October, consumer prices rose 0.76% compared to the prior month, slightly below September’s 0.78% reading.
Nigeria: PMI records best result since December 2014 in October.
November 3, 2017.
The Stanbic IBTC Bank Nigeria Purchasing Managers’ Index (PMI) gained ground in October rising to the highest level since December 2014.
Комментариев нет:
Отправить комментарий