Random Thoughts

An explanation to Why the Naira is Crashing Now

People have been asking why the naira is crashing so fast, especially against the dollar. And why now? To understand why and why now, we first need to understand how forex works.

Forex, in simple terms, is the buying and selling of currencies. The trade usually takes place between a pair of currencies. In this case, we are talking about the dollar versus the naira.

Forex Prices

What determines the price of exchange between a currency pair? Well, there are many factors involved here. But in essence, it comes down to the economic situation of the countries whose currencies are involved. The political situation of the countries could also contribute to forex prices between two currencies.

For example, did you hear about the Taksim Square riots of May 2013 in Istanbul, Turkey? I was still in Northern Cyprus when this happened, and saw the Turkish lira weaken against the dollar. From the chart below, you can see how the USD to Turlisk lira climbed.

USD/TRY (green) and EUR/TRY (yellow) during the 2013 Taksim Square riots

I made the USD as the green line, and the Yellow line is the EURO. As you can see, both climb in correspondence with the milestones of events leading up to the riots. Some of these milestones (in red circles) were political, and had nothing to do with the riots.

The results? Tourists were afraid to travel to Turkey as Taksim Square was a big tourist center of attraction in Istanbul. In June of 2013, I had to visit Istanbul for an international marketing seminar. They had to shut off Taksim Square to visitors, and I had to take a photo (below) for myself, as souvenir. It also turned out that many participants cancelled out on the event, due to fear of the riots.

Taksim Square

You can now see how this all affects the strength of the Turkish lira against any other major currency. The effects of these social and political events lasted long after the riots were over.

Now back to Nigeria, and consider all that has happened since the new president. There has been Lassa Fever, Ebola and Boko Haram. What about the uncovering of loots, even as far back as Abacha’s regime? All these things affect the Nigerian economy, and eventually the naira.

Currency Wars

So when we talk about the price of one currency against the other, we’re talking about a game of Currency Wars. That is, a Tog of War between the 2 currencies.

As one currency weakens in forex, the other strengthens against the weaker currency. If one currency strengthens, the other must fight back to keep the balance. Failure to fight back, results in a tip in the balance. Only the strong will survive.

The naira, in itself, may not have weakened in the last decade, so to speak. But the dollar has definitely strengthened over the last decade. Consider the chart below, showing the increase in jobs in the USA over the last decade.

Source: Bureau of Labor Statistics, Current Employment Statistics Survey

I am a forex trader, so I know these things. Like, I know that each month when the number of new jobs created in the USA get released, it changes the whole market! That means the American economy has been strengthening over the last decade. The naira failing to fight back, has resulted in the steady increase in USD/NGN rates we have been experiencing.

Not Fighting Back

But what has Nigeria done for itself, to strengthen its own economy, and thus the naira? Not much! The dollar is getting strong, and the naira is doing nothing to fight back, and this is why the naira is crashing. The same applies to other major currencies that are building themselves up.

Ben Bruce says we should patronize Nigerian products/goods, and I agree. But some of you would ask “this is not a new problem, so why is the naira crashing now?” It is crashing NOW because the dollar is strengthening NOW, and the naira is NOT fighting back NOW.

But there is hope, still! There are a several ways to save the naira, and we are not implementing any one of them right now. Until we do so, the naira will continue to sink, while the other major currencies strengthen.

Saving The Naira

Ben Bruce has something to say about how we can attempt to save the naira, and I support him. Also, I have some ideas on how we can save the naira.

Saving the Naira

First, the CBN should give banks license to do forex at the advertised “official” rates. Then the CBN should check all (yes, all) international transactions, to reduce money laundering. This, and also patronizing our local brands, can save the naira now and in the future. I talk more about it in details here: www.kheme.tk/2016/02/how-to-save-the-naira-in-2016/.

So if we do nothing to strengthen the naira, the other currencies will beat the naira in the currency wars. We have to act now and we have to act fast!

What is your opinion about the crashing naira?

Please share in the comment section below.