About US$5 trillion is traded every day in forex markets, with investors effectively swapping currencies the world over.
- In Nigeria, the Central Bank has abandoned its long-standing currency peg, meaning that the currency will be exchanged at a fluctuating rate as determined by the market.
- Currently, the shift in Nigeria’s forex policy may have a more direct impact on Nigerians and local economies, too.
Forex trading constitutes one of the truly universal methods of investment practiced around the world. As such, it is incredibly popular. The latest estimates suggest that roughly US$5 trillion is traded every day in forex markets, with investors effectively swapping currencies the world over.
As much as forex is thought of as a free-flowing, global marketplace of currency trades, the market in individual countries and regions can still be affected by government regulations.
This is proving to be the case of late in Nigeria, where new forex policies have been implemented. Specifically, the Central Bank of Nigeria has made the decision to abandon its long-standing currency peg.
Nigerian Naira exchange rate to be set by the market
A currency peg – for those who may not be familiar with the term – is an order that a given nation’s currency will be exchanged at a fixed rate. The idea is to stabilize exchanges across borders and with other currencies.
As a consequence of the Central Bank of Nigeria’s recent decision, however, the Nigerian naira will no longer be “pegged” and will instead be exchanged at a fluctuating rate as determined by the market.
Once upon a time, this might not have made an enormous direct impact on the Nigerian economy. Or, at the very least, the impact would have existed primarily at a macro level, where the trade interests of the nation itself were concerned.
As things now stand, however, the shift in forex policy may have a more direct impact on Nigerians and local economies. This is because, in recent years, a handful of factors have led to African nations, including Nigeria, participating more regularly in the aforementioned global forex market.
First among these factors is the ever-expanding access to the online world that millions around Africa are enjoying. Just this past May, you may have read about the high-speed internet being made available to 100 million people throughout Africa courtesy of new initiatives by Microsoft. This was just the latest example of expanded connectivity, and among its benefits are opportunities for Africans and Nigerians specifically to participate more easily in global financial markets – including the currency trade.
Nigerians can trade currencies from connected devices
With a greater ability to trade forex online, Nigerians and others around Africa can now trade currencies from any connected device. At reputable trading platforms, they can capitalize on up-to-date prices, enjoy ultra-fast execution of trades, and take advantage of instant withdrawals when needed. They can effectively gain full control over currency investment accounts.
Moreover, access to forex trading online also means access to education and analytical tools concerning the market. People introducing themselves to the currency market can not only conduct trades but also learn the strategies and methods commonly used to generate favorable results.
Reduce dependency on US dollar
In addition to expanding internet access and the growth in online forex trading opportunities, it is also possible that de-dollarization efforts are encouraging more activity in the currency trade. The term de-dollarization is being used to describe unofficial initiatives around Africa and various other parts of the world to reduce dependency on the US dollar.
In theory, this, in turn, would lead to reduced trading and fewer consequences stemming from dollar-related sanctions. In the meantime, however, de-dollarization efforts encourage more trading in local currencies and potentially with dollar alternatives. The full effect of these unofficial policies is as yet unknown, but it is certainly possible that the encouragement of currency trading activity not involving the dollar is spurring more diversification of forex activity.
Altogether, these shifts in the African trading landscape have led to notable increases in the number of forex traders. Some estimates early in 2023 suggested that well over 1 million people around the continent are now actively engaged in the currency trade. Various sources peg the number in Nigeria, specifically at close to 300,000 traders.
Nigerian currency rates determined by markets
This is significant regarding the Nigerian government’s recent decision to abandon the currency peg on the naira. Because now, there are tens or hundreds of thousands of citizens on any given day who may be exchanging Nigerian currency at rates determined by the markets. Indeed, this very process contributes to re-setting and simultaneously reinforcing the naira’s value.
Unsurprisingly, that value has plummeted since the Nigerian government announced the end of its currency peg policy in June. For reference, 1 Nigerian naira was worth 0.0022 USD on June 9th; it has since twice reached a nadir of US$0.0013 in value and, at the time of this writing, is worth US$0.0014.
This is not due entirely to the transactions being made by the private forex traders who have emerged throughout Nigeria and Africa more broadly. All forex transactions have played into the shift in the naira’s value, however, from private trades to large-scale trade operations.
One helpful way to think about the matter is that international trade and currency markets are in an ongoing process of determining a fair value for the naira now that it is not pegged at a specific, pre-determined point.
In the short term, the downward shift in the naira’s value due to the de-pegging policy and subsequent forex activity is hurting aspects of the Nigerian economy. As was explained when the currency peg was removed, the initial idea was to attract foreign investors in the naira –– the idea being that there was wealth to be gained for those who bought into a currency with the potential to rise in value.
Losses from shifting exchange rates
Initially, however, this positive effect has not been realized. Instead, some of Nigeria’s biggest and most economically influential companies have experienced declines in profits and significant losses resulting from shifting exchange rates. Dangote Cement Plc, Guinness, Nigerian Breweries Plc, and MTN Nigeria were all mentioned in early reports among the major companies that have been hurt.
The hope, ultimately, is that any damage to the Nigerian economy is temporary. In the short term, abandoning the currency peg and allowing the naira to drop in value has hurt these and other businesses by decreasing their buying power.
Any time a country’s currency is drastically devalued, imports to that country become more expensive. As stated, however, the initial goal was to attract foreign investors – which may still happen as the naira stabilizes at a lower value. A fresh wave of investment would offer fresh strength to the naira and could help Nigeria’s biggest companies and overall economy rebound.
As of this writing, a new currency policy coupled with an increasingly active forex market has put a dent in the Nigerian economy. It is too early to say, however, if that dent will last when trading markets have had more time to adjust to the change.