Nigeria remains a mono-cultural economy with export of crude oil as its economic mainstay, therefore it is no news that the plunging prices of oil in the international market has increased pressure on the naira.
Africa’s largest economy exports mostly crude oil, but it spends its foreign earned currencies on supplies abroad for basic items such as food, wears, electronics, and refined petrol. According to Nigeria’s foreign trade report, in 2019 alone Nigeria spent about N16.959 trillion ($47 billion) on imports compared to N13.1 trillion ($36.5 billion) a year earlier. It spent about $28.7 billion on invincibles (spend on services such as professional fees, financial services, business travel, medical tourism, etc.)
This illustrates how Nigeria imports everything, since Nigeria produces less locally, thereby increasing demand for the dollar needlessly; importers need American dollars to pay for goods bought abroad, causing depreciation of Nigeria’s local currency. Though the disparity between the official rate and parallel market rates has narrowed to about 10%, the naira is still experiencing pressure from the strong dollar.
Since the start of the COVID-19 pandemic, the value of the American dollar has reached record highs, as many investors around the world are rushing to have a part of it.
According to the International Monetary Fund, the American dollar is still the most popular currency. As at Q4 of 2019, it made up about 60% of all known central banks’ foreign exchange reserves.