Factors influencing foreign exchange rate in Nigeria (dollar to naira)
We have read so much about the fall in the value of naira and the current dollar to naira black market exchange rate, but we also need to look at the factors that contribute and affect the exchange rate in Nigeria. It’s no secret that the value of the Nigeria currency depreciates quite often and we can see that from the change in the exchange rate between last week Thursday and today. Dollar to naira black market rate today is traded at 710 naira per dollar. The exchange rate at the Central Bank of Nigeria (CBN) is now N416.37
Factors influencing the foreign exchange rate
There are many factors that influence the exchange rate in Nigeria and we can learn more about these factors below.
From the points mentioned above, we can identify the major problems and how they affect the foreign exchange rate in Nigeria.
We have read so much about the fall in the value of naira and the current dollar to naira black market exchange rate, but we also need to look at the factors that contribute and affect the exchange rate in Nigeria. It’s no secret that the value of the Nigeria currency depreciates quite often and we can see that from the change in the exchange rate between last week Thursday and today. Dollar to naira black market rate today is traded at 710 naira per dollar. The exchange rate at the Central Bank of Nigeria (CBN) is now N416.37
Factors influencing the foreign exchange rate
There are many factors that influence the exchange rate in Nigeria and we can learn more about these factors below.
- Interest rates
- Inflation
- Public/ government debt
- Economic stability
- Political stability
- Interest rates: these are attached to inflation and exchange rates. Countries differ in the way the central banks use interest rates to modulate inflation within the country. If the rates remain high for a long period of time, inflations will creep in and it would eventually lead to a fall in the value of the country’s currency. There needs to be a regular check and balance on these rates.
- Inflation is the general increase in prices and fall in the purchasing value of money. When a country has a high inflation rate, the value of its money decreases. Nigeria has a high inflation rate and due to this, the value of naira has depreciated. The difference in the inflation of a country’s currency results in difference in purchasing powers and different currency rates. Countries with low inflation have stronger currencies and see appreciation in their currency compared to countries with high inflation.
- Public/ government debt: most countries finance their budget using large scale deficit financing. This means that they borrow to finance economic growth. Such a country with high debt will not spend much money investing in other counties and when there is a greater supply of the country’s currency, there will be a decrease in the value of the currency.
- Economic stability: economic stability is also a determinant, the growth or recession of a country or economy can affect the exchange rate in that country. Economic recession may cause depreciation in the exchange rate because interest will fall. A stronger economy attracts more foreign investments and this aids to lower inflation and boost the country’s currency exchange rate.
- Political stability: the same way a country with stable economy attracts more foreign investments, so also a country that is politically stable attracts foreign investments. These investment drives up the currency rates. Countries like this have a higher and valued currency. When there is no political stability, the currency exchange rate depreciates.
From the points mentioned above, we can identify the major problems and how they affect the foreign exchange rate in Nigeria.
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