The foreign exchange market is one of the biggest financial markets in the world. Forex trading functions much like stock trading — except the main and only commodity of exchange is currency. Forex traders profit by trading around the difference in exchange rates of currency. Due to this, forex rates are influenced by a country’s economic strength and can significantly impact a country’s economy as well.
Modern forex trading has become incredibly agile, with spreads changing during economic news releases and market events. As such, brokerages offer market protection features that shield trader positions against market volatility and delays or avoid stop-outs. Brokerages also offer fixed margin requirements for when high-level economic news is published that can affect forex instruments.
Currency exchange enables a country’s institutions to conduct business with other countries. The stronger a currency, the more value it has and the more it’ll be able to thrive in the international trading market. For example, in our previous post on the Japanese Yen’s currency strength, experts and strategists predict the currency to strengthen over the next three, six, to 12 months due to a trade deficit that can become a trade surplus thanks to booming tourism. On the other hand, when there is uncertainty in the market, price adjustments are made in the forex market, affecting the profit margins of forex traders.
Nigeria’s currency reforms
Most recently, Nigeria is close to implementing currency reforms in alignment with newly-elected President Bola Tinubu’s commitment to unify Nigeria’s multiple exchange rates. This aims to foster a more streamlined and efficient currency market. The Central Bank of Nigeria has reportedly granted commercial banks and forex market dealers authorization to sell foreign exchange at market-determined rates freely.
In recent years, Nigeria has experienced fluctuations in its currency value, leading to challenges in the country’s importation and economy. Alongside currency reforms, President Tinubu also implemented subsidy removals that tripled petrol prices, reducing the stress of Africa’s largest economy.
Investors’ response
While experts initially expressed concerns about the consequences of a floating exchange rate system, the reforms have prompted increased trading activity. Recent reports indicated that trades reached as high as N750/$1. At the same time, the new forex unification policy has boosted stakeholders’ confidence. Stakeholders in aviation expressed support for the federal government’s unification of the forex in the hopes that it can improve the sector and create equity. They also stated that the development of remittances and foreign direct investments — especially foreign airlines — will see an appreciable surge once the government establishes consistency in the new unification policy.
The World Bank has also expressed support for Nigeria’s subsidy removal and forex unification, explaining that the policy is vital to rebuilding the country’s economy. A lead economist at the World Bank also stated that the removal of fuel subsidies is expected to achieve estimated fiscal gains of approximately N3.9 trillion in 2023.
Lagos-based investment firm FBNQuest stated that a significant financial benefit of the forex unification is the expected increase in revenue disbursements to the federal, state, and local governments thanks to the higher exchange rate applied to convert oil revenue proceeds.
Analysts also believe the unification of the naira is expected to boost investors’ confidence, attracting more forex traders. Removing restrictions on domiciliary trading accounts can also combine with the flexible forex pricing framework to support autonomous dollar inflows into the country.
Nigeria’s economy
As previously mentioned, Nigeria’s economy faced fluctuations in recent years. In 2021, food prices in Nigeria were at an all-time high. At the same time, inflation was shrinking disposal income, tipping Africa’s most populous country towards impending food scarcity. Analysts warned that the risk of famine was genuine, as high food prices and dwindling income led to diminished affordability. The limited purchasing power of Nigerians at the time in a country with over 23.2 million unemployed people put basic food commodities out of reach for many.
Meanwhile, a forex shortage this year led to a shortage of drug and vaccine supplies. GlaxoSmithKline Plc’s Nigerian unit — the second biggest drug manufacturer in the country — struggles to maintain supplies of its pharmaceutical and vaccine products due to a shortage of dollars to import ingredients. This shortage was associated with a 61% differential between the price offered by the central bank and the black market. While the official rate was N464.94 per dollar, it traded at about N750 on the street. According to President Tinubu, forex unification through a uniform exchange rate system will increase the availability of dollars to domestic businesses.
Beyond the exchange rate unification, however, experts believe that more needs to be done to alleviate Nigeria’s inflationary pressure in the future. One such way is through widescale investments in agricultural production in the country. This can help cushion the impact of higher spending on petrol — which is necessary for transportation from farm gates to markets. Policy reforms that can boost the production of staple foods can attract investments, earning Nigeria significant export revenues while alleviating threats of food inflation.
Another critical step is to improve the local forex market by boosting supply. For example, prioritizing the supply of dollars to support the naira float can help. Increasing the sources of foreign exchange outside of the current crude oil exports. This calls for a diversification of the Nigerian economy, away from its dependence on fossil fuel, by profitably investing in non-oil resources. After all, Nigeria is relatively rich and replete with solid minerals. According to the Nigerian Investment Promotion Commission, Nigeria has 45 different solid minerals buried in various locations across the country — all largely untapped.
Investing in solid minerals will not only boost foreign exchange earnings but can also assist in resolving Nigeria’s huge energy poverty. One of the reasons the country is yet to achieve rapid adoption of solar power systems is the cost of purchasing and replacing batteries, often sourced cheaply from Asia with very low quality and longevity. Prioritizing investment in Nigeria’s many solid minerals may lead to solar batteries being manufactured locally and sold at comparatively affordable rates.