Why is the CBN struggling to defend the naira?
The tale of George Soros breaking the Bank of England is legendary.
He did it by betting a huge amount of money (roughly the equivalent of £10 billion according to some estimates) against the pound sterling in 1992. He then repurchased the British currency for a lot less than he sold it for, earning $1 billion in the process. The collapse led to a pound (£) devaluation of about 15%, forcing Britain to withdraw its currency from the European Exchange Rate Mechanism (ERM)—the European Union’s attempt to reduce exchange rate variability for their economies back in the day. The day later became known as Black Wednesday.
Key takeaways:
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Nigeria’s central bank (CBN) has been facing increasing pressures to maintain its “managed” exchange rate regime due to increasing speculative activity against the naira.
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Currency speculations are usually the result of reduced confidence in a monetary authority’s ability (and will) to defend its currency.
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Dwindling oil revenues from low oil production as well as high and rising inflation make it very difficult for the CBN to draw on the two tools—international reserves and interest rates—it needs to keep the naira from falling in value.
I thought it fitting to kick today’s article off with this story for two reasons.
The first (and perhaps less serious) reason is the awareness that the current state of the global economy
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