Why Is Naira So Weak?
There was a time the CBN governor was blaming Abokifx for Naira’s weakness… It is like blaming Livescores for Arsenal’s defeat when all Livescores does is show the results of Arsenal’s performances. But naira has become weaker and weaker since Abokifx stopped displaying USD-NGN exchange rates.
Abokifx was only displaying the economic realities, and that was all.
There are certain things wrong with Naira and one of the most conspicuous of those things is that Naira is getting weaker and weaker rapidly, owing to inflation.
What an N1000 note could buy last year, it can no longer buy this year and what it can buy this year, it won’t be able to buy next year.
The are 2 types of inflation:
Cost-push inflation: This is when demand remains the same or grows when the price goes up. There are instances in which suppliers try to cut back on supply so that prices will go up. Prices go up drastically but demand does not go down… As prices go up, demand also goes up, causing prices to rise upwards further.
Petrol, bread, and the US dollar are good examples of this. The more the price goes up, the more people want to buy. It’s hard to scale back on consumption in any modern economy.
Demand-pull inflation: This is when higher demand meets insufficient supply, driving prices up. Some also call this a “supply shock.”
What contributes to inflation, then? Psychology.
According to It is Livescores for Arsenal’s defeat, when all Livescores does is to show the results of Arsenal’s performances.: “You wake up in the morning, you see inflation around you and you say, well I was thinking of buying a refrigerator, I better go buy it now before the price goes up or a new car or suit or whatever.”
When demand is getting higher and higher and supply is getting lower and lower, prices will go through the roof! It means you need more Naira to buy the same amount of things you used to buy with less Naira.
We are largely a consuming nation. Most of what we consume is not produced here – one of the reasons why Naira is weak.
The economy is bad, and there are bad economic policies on the part of the federal government as well as CBN.
They keep on borrowing money to finance liabilities and one of the conditions given by the creditors is that Naira should be devalued.
It is clear that CBN monetary policies cannot help the Naira, although most of the policies don’t contribute to inflation.
In the past, CBN was selling hundreds of thousands of dollars to Bureaus de Change (BDCs), and the value of the Naira was very stable then (around N360/$).
Since they stopped supplying dollars to BDCs, Naira has been in a free fall. They cited illegal activities by BDCs as one of the reasons why they stopped; whereas Naira itself is being used for a plethora of illegal activities.
What they wanted to do is to destroy the demand for dollars, but that action has failed. It even backfired.
You would need to go through a lot of conscientious frustration before you can get dollars at a bank, submitting documents and eventually getting a limited amount, and only for a few purposes. There are numerous uses for US dollars, and when people can’t get it at banks and they can’t get it at official rates, they turn to the parallel market (black markets).
Hence the ever-growing demand and ever-decreasing supply of USD.
There are many economic activities that CBN cannot control (like oil drilling, tractors and trucks driving, cargo unloading, ships piloting, etc.) And that is why they are powerless to reverse the current inflation in the country. The only thing they can really do to control inflation is to destroy demand, and that cannot succeed.
Perhaps when a new national government takes over power, things will improve.
The problem of inflation is not peculiar to Nigeria alone, it is all over the world. Even the situation in some countries is worse than in Nigeria.
As regards the US situation, Jim Rickards, a foremost economist, says:
“In fact, some of their policies are destroying the country’s economy. By raising interest rates, mortgage rates go up. Unemployment goes up. People are laid off. Financial uncertainty sets in.
And it gets worse.
The Devil and the Deep Blue
As you read this, the Fed is trapped between Scylla and Charybdis…
It is on the horns of a dilemma…
Between the devil and the deep blue sea…
A rock and a hard place.
No matter what they do, Jim says, a reckoning is coming.
To see our current rates, please visit www.ituglobalfx.com.ng
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