The Dollar to naira depreciation is no news, especially in recent years. In fact, it is safe to say that the naira/dollar exchange rate is one of the most discussed issues plaguing Nigeria. It is a topic either discussed with a smile (if being paid in dollars and resides in Nigeria) or with a frown (if otherwise) and must I say, only a few conversations of this topic are discussed with a smile …… in Nigeria of course.
There have been a number of speculations of reasons for the recent steady depreciation. While some attribute the steady depreciation to the high demand for foreign exchange (dollars) against the supply in Nigeria, most blame it on the falling oil prices in the international market and its consequential pressures since the dollar is the globally accepted exchange currency.
Thankfully, this article will not help contribute to the speculations on the cause of the depreciation. The idea of this article is to shed some light on the past and the future of the naira/dollar depreciation.
Quick one: Would it not be such a relief to be told that in the nearest future, the exchange rate, based on data, will fall drastically?
It would be and I would have loved to be the bearer of such good news but that would not be the case…based on data of course.
But what does data tell us?
Let’s dive into the past and see what historical data says till date.
Fig.1: Average Monthly Dollar to Naira Exchange Rate (1991-2016)
Fig.2: 15-period Moving-Average of the Dollar to Naira Average Monthly Exchange Rate (1991-2016)
Fig.3: Dollar to Naira Average Monthly Exchange Rate/15-period Moving-Average (1991-2016)
What this data shows:
One obvious takeaway from Fig.1-3 is that between 1991 till 2016(Fig.1 and especially Fig.2), there seems to be a rising or upward trend in the exchange rate.
The graph below also shows this same trend occurring on a yearly average exchange rate.
Fig.4: Dollar to Naira Yearly Average rate (1991-2016)
Fig.5: Dollar to Naira Yearly Average Depreciation rate (1991-2016)
N: B – All raw data were sourced from CBN and Abokifx
– Data used are the BDC(Bureau de change) rates, not Inter-bank rates
– For the sake of this article, a monthly and yearly average of the daily dollar to Naira exchange rates changes were calculated and used.
Based on the graph above, it is safe to conclude that, all other things being equal, the exchange rate is ever going to be on an uprising movement. Unless an outlier event occurs.
There are two vital observations that can be derived from Fig.5 which to me, were shocking
· Contrary to the common perception, 2016 did not record the highest depreciation rate in the Nigerian exchange rate history. The highest ever recorded depreciation rate was in 1993 at 78% depreciation rate followed by 2016 at 67% which is the second highest recorded.
· 2007 recorded the highest appreciation rate (or the lowest depreciation rate) of -7%
The next questions, I reckon, that is currently on your mind are: What happened in 2007? Why was that year different? And 1993? Are we on our way back to 1993 in terms of depreciation rate?
And more general questions that are bound to start springing up will be: What can we do about the current predicament? Can these observed trends ever be altered? Has there ever being case studies of countries with similar problems who have succeeded in altering their trends? If not, can we use this depreciation of currency to the country’s advantage? If yes, how?
These are questions that definitely need to be answered decisively.
But that would be a topic for another article.
For now, it is good to bear in mind that the days of ₦1 to $1 are long gone and the days of ₦1000 to $1 may not be so far into the distant future after all.
For the request of raw data contained in this article, feel free to contact me.
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