Understand the exchange rate crisis in Nigeria

Over the past few months since November 2014 the Naira has faced serious depreciation, jumping from a stable value of about N165 per dollar to a N170 per dollar within two weeks in November 2014.

The problem of the Naira was precipitated by the falling oil prices. The falling prices sent the Nigerian stock market into a frenzy due to the large dependence of the Nigerian economy on crude oil. This led to huge capital outflow as international investors started pulling out in order to cut their losses.

To understand how this event affects the value of the Naira, think of it this way: If I'm pulling out of Nigeria as a U.S investor I will want to exchange my Naira returns for Dollars. This way, there is a large number of people exchanging Naira for Dollars. The supply of Naira is now larger than the demand of it and as is to be expected, the price/value falls. Think of the spot exchange rate as the price of the Naira. The Naira then continues to depreciate relative to other currencies for as long as the investors feel uncertainty and think it best to move their investments into other arenas/countries.

To compound the problem of Nigeria, elections introduced even greater uncertainty into investment decisions. With the political instability and threat from Boko Haram, people are uncertain about how the outcome of the elections may cause Boko Haram to react if they find the result unfavourable. More uncertainty means more people will pull out from Nigerian stocks as you expect them to fall in value.