The Chief Executive Officer, Economic Associates, Dr Ayo Teriba, has said the level of demand and supply of foreign exchange is a major determinant of the exchange rate of the naira to the dollar.
Teriba said this in a presentation obtained by our correspondent titled ‘How to stabilise the naira’.
He said, “The exchange rate is a mere indicator of the balance of supply and demand forces in the foreign exchange market.
“Those who are discussing exchange rate developments without reference to the unfolding realities of demand and supply are chasing the shadows instead of substance.”
He said the recent slides in the official exchange rate of the naira and the dramatic widening of the parallel market premium signalled that the unease in the Nigerian foreign market had intensified, and tested the capacity of the country to stabilise the naira.
According to him, the current exchange rate crisis was triggered by the forex supply shortfalls in the wake of the pandemic-induced global lockdown in 2020.
Teriba quoted figures from the 2020 statistical bulletin of the Central Bank of Nigeria.
He said, “Nigeria’s annual average net goods exports inflow of $34bn from 2005 to 2014 had dropped to an annual average inflow of $5.9bn from 2015 to 2019, before dipping steeply into steep net outflow of -$16.4bn in 2020 (that was a $50bn shortfall relative to the 2005-2014 average) and it is likely to remain a net outflow in 2021.
“Balances on Nigeria’s trade in services and incomes have historically been negative. Remittances is now the only source of net inflow on Nigeria’s current account, with annual average inflow of $21bn from 2005 to 2020.
“This was not large enough to offset deficits from goods, services, and income, leaving the current account in a steep deficit of -$16.98bn in 2020.”
According to him, the overall forex supply conditions are determined in part by generic developments in external trade and payments conditions that have reduced net-inflows of forex into Nigeria and all other countries.
“The supply was also determined by government’s capacity to boost the sizes of net-inflows from targeted components of the current and capital accounts, especially in the face of pandemic-related downswings in global economic conditions that helped some countries blunt the edges of adverse generic shocks,” Teriba said.
He added that confidence or lack of confidence of residents and non-residents in the ability of the government to stabilise supply in the event of adverse shocks could inform their decisions on whether to hoard or sell foreign exchange, especially in the face of crisis.
