There are many factors that are clearly responsible for the continued depreciation of the naira against the dollar.
One of the main reasons is that Nigeria spends most of its foreign exchange on importing essential goods such as electronics, refined gasoline, wear and tear and food.
Nigeria spent a total of 47 billion US dollars on imports in 2019, 28.7 billion US dollars was spent on unbeatable things like financial services, medical tourism, professional fees and business travel.
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The constant demand for US dollars by Nigerian importers is the main reason why the Nigerian naira continues to depreciate while the dollar strengthens.
Nigerian importers are constantly in need of dollars to import goods and pay for services overseas, which continues to have a negative impact on the naira.
The fact that Nigeria does not produce much locally makes the country dependent on imports to survive.
Between 1999 and 2021, the value of the US Dollar in Nigeria has increased by more than 500%, this increase is detrimental to the viability of the Nigerian economy.
However, we must realize that this did not just happen overnight, there are many factors that contributed to this, this rise in the value of the dollar could continue until these factors are addressed.
Factors that cause the naira to depreciate against the dollar
Over the years, the Nigerian naira has seriously depreciated against the US dollar. One US dollar is currently worth more than 400 naira.
There are many factors that influence the devaluation of the naira against the US dollar.
The continuous increase in the prices of products and services has caused the naira to further depreciate. Locally produced goods are several times more expensive than imported goods, so people prefer to patronize imported goods, which negatively affects the value of the Nigerian naira. The purchasing power of the naira has decreased significantly as the prices of goods and services continue to rise.
Overdependence on Crude Oil
Although crude oil has brought wealth to Nigeria, it is also the main reason why the Nigerian currency continues to depreciate. As we have said, about 85% of Nigeria’s export earnings come from oil. Knowing that the Nigerian economy depends solely on crude oil for survival has prompted some financially savvy Nigerians to increase their dollarization.
As mentioned earlier, oil is valued in dollars worldwide which has resulted in the US dollar remaining a major player in the Nigerian economy to the detriment of the naira.
Lack of Security
Insecurity is one of the main problems that negatively impact the Nigerian economy. Many foreign investors are reluctant to invest more in the Nigerian economy because of the Insecurity. We will agree that Boko Haram terrorists, bandits, herders and other crimes have destabilized the country in recent years, causing some companies to collapse, some investors selling their investments and leaving the country. This affects inflows of money into the country and increases outflows, which explains persistent reports of dollar shortages, causing the dollar to appreciate.
An increase in the US dollar will automatically cause the naira to depreciate.
Corruption has severely affected the country’s economy, and some politicians have laundered money and invested it in real estate abroad. Billions of naira have been exported, which has also increased cash outflows into the country, which continues to weaken the naira.
I’m you have gained one or two things regarding the reason Why is Naira falling against Dollar.
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