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Nigeria is still being hit hard by the effects for a sudden decline in global oil prices and this is not peculiar to Nigeria alone. Many countries that are reliant on crude oil sales for government revenue are already feeling the impact of declining revenues on their currencies.
However, Nigeria is having it worse than most because crude oil sales actually accounts for more than 80% of our GDP. More so, the country is import dependent; hence, the fall in global oil prices, the attendant drop in our revenue and the subsequent drop in the value of the Naira are all making the foreign exchange (forex) outlook of the country look very bleak.
Interestingly, the Central Bank of Nigeria (CBN) is working towards maintaining sanctity in the Nigerian Forex space. According to the governor of the CBN, Mr. Godwin Emefiele the CBN is committed to cracking down on speculative demand for foreign exchange as it continues to work hard to defend the Naira.
Speculative Demand for Forex Explained
Speculative demand for foreign exchange is one of the strongest factors that could reduce the value of a nation's currency because it causes the forces of demand and supply to work against a nation's currency. Take for instance, a scenario where the Naira trades at a rate of $1 equals N150, the equilibrium in the volume of demand for dollars and its supply will keep the exchange rate intact at $1 equals N150.
Nevertheless, if people have reasons to believe that the dollar could appreciate against the Naira next month to a rate of $1 equals N160. They will naturally want to buy more dollars now at the N150 exchange rate with the hopes of making additional N10 in profit when the exchange rate changes to N160 next month.
However, an increase in the demand for the dollar (more buying) will alter the market equilibrium that kept the price at $1 equals N150 and thus, sellers of the dollar might raise the rates to $1 equals N155 next week. In essence, speculators were expecting the exchange rate to change from N150 to N160 next month, but their speculative actions have succeeded in raising the rates from N150 to N155 within one week.
Intensified Crackdown on Speculative Forex
In a bid to stem potential speculative demand for forex, the CBN according to Mr. Emefiele is concerned with the "need to moderate demand. No need to panic and front-load demand for foreign exchange. The CBN stands ready to meet genuine demand and stop speculative demand for foreign exchange. CBN will not hesitate to suspend dealership licenses of banks fueling speculative demand and involved in forex malpractices as well as infractions."
How the Crackdown in Speculative Forex Benefits You
Going forward, importers will only be able to obtain just enough forex to cover their business transactions. Hence, importers who engage in the side business of running illegal bureau de change would surely find themselves out of business.
In the short to medium terms, the CBN says it is thinking of suspending the sales of dollars for the importation of goods with locally produced equivalents. The proposed halt with be the hardest felt for importers but it will most likely be a step in the right direction for the country.
For one, it would stimulate growth in the Nigerian economy by channeling the demand for foreign-produced items into locally produced items.
Secondly, the growth in local industries will drive entrepreneurial undertakings that will provide additional employment in the country.
Thirdly, the Naira will be strengthened against other currencies as our Balance of Trade and Balance of Payments improve because of reduced importation
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