What is causing Nigeria's dollar shortage?
Dollar shortages. Source: Shutterstock

Nigeria’s dollar scarcity is no longer news.

From reducing spending limits on international transactions via your naira debit card, banks are now suspending the transactions altogether.

Our fx shortage woes are not new. Because the Central Bank of Nigeria (CBN) practices a managed exchange rate regime, it draws on our external reserves to maintain the price of the currency at a predetermined value. This is not entirely problematic, as leaving the market to determine your currency's price can lead to a lot of volatility, making it difficult for businesses and investors to plan. However, the CBN’s approach to managing the naira's price can be described as unorthodox since it no longer attempts to control supply but demand as well.

 

Key takeaways:

  1. Nigeria is going through another fx shortage, as we saw in 2016 and 2020. However, unlike those previous years when oil prices (our major fx source) were low, oil prices are high in 2022.

  2. The CBN’s managed exchange rate regime requires it to control the fx supply to ensure exchange rate stability.  So when an oil price crash happens (like in 2016 and 2020), our fx supply follows.

  3. However, due to external and domestic issues impacting our sources of fx (i.e. trade, remittances, foreign investments and external debt), Nigeria’s ability to rake in fx has largely been compromised.

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In a simpler world, exchange rate management is typically done by raking up large reserves (Saudi Arabia, for example, has roughly $450 billion in reserves versus Nigeria’s $38.5 billion).

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Yomi Ajayi

Yomi Ajayi

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