Exchange rates play a crucial role in the Nigerian economy. As an oil-dependent country with significant imports, Nigeria relies heavily on foreign currency, particularly the US dollar.
Therefore, any significant changes in the exchange rate in the official, as well as dollar to naira black market rate, can have far-reaching effects on businesses and individuals alike.
One factor that can cause exchange rate volatility is political instability. In this blog post, we’ll explore how political instability affects the dollar to Naira exchange rate in Nigeria.
Here, we will examine the Nigerian political context, the impact of political instability on the Naira, the role of external factors, and strategies for managing exchange rate risks.
So, without further ado, let’s get started!
The Nigerian Political Context
Nigeria’s political history is fraught with instability, with military coups and civil unrest frequently disrupting the democratic process.
The current democratic dispensation began in 1999. Although Nigeria has experienced relative stability since then, recent events have raised concerns about the country’s political future.
One significant example of this instability is the recent #EndSARS protests, which started in October 2020 and lasted for several weeks.
The protests, which called for an end to police brutality and reform of the police force, soon turned into a broader movement against government corruption and mismanagement. The protests were met with a violent crackdown from security forces, resulting in numerous deaths and injuries.
The Impact of Political Instability on the Naira
Political instability can have a significant impact on the value of a currency. When investors perceive a country as politically unstable, they become hesitant to invest in that country, causing capital flight. As a result, the demand for the country’s currency decreases, leading to a depreciation of its value.
This scenario has played out in Nigeria several times in the past. For example, during the 2015 election cycle, the Naira lost more than 20% of its value against the US dollar as investors pulled out due to concerns about the outcome of the election.
Similarly, during the #EndSARS protests in 2020, the Naira lost value against the US dollar as investors became wary of the country’s political stability.
Related: The Impact of Inflation Rates on Exchange Rates in Nigeria
The Role of External Factors
External factors can exacerbate the impact of political instability on the Naira. As said earlier, Nigeria’s economy is heavily dependent on oil exports, which account for over 75% of its export revenue in 2021. Therefore, changes in oil prices can have a significant impact on the Nigerian economy and the Naira.
For example, during the 2014 oil price crash, Nigeria’s economy contracted, and the Naira lost value against the US dollar. The crash was influenced by political instability at the time, as the government struggled to manage the impact of falling oil prices.
Additionally, changes in international trade policies can also affect the value of the Naira. For instance, the US-China trade war had a significant impact on the global economy, including Nigeria. The uncertainty and volatility caused by the trade war led to a decrease in demand for Nigerian exports, leading to a depreciation of the Naira.
Strategies for Managing Exchange Rate Risks
Given the impact of political instability on the Naira, individuals and businesses must take steps to manage exchange rate risks. One way to do this is through hedging, which involves using financial instruments such as futures or options to protect against exchange rate fluctuations.
Another strategy is diversification, which involves spreading risk across different currencies and investments. For example, businesses can consider expanding their operations to other countries, which can help reduce their exposure to political instability and exchange rate volatility in Nigeria.
Political instability can have a significant impact on the dollar to Naira exchange rate in Nigeria, with lots of effects on the economy. The recent #EndSARS protests and past election cycles have demonstrated the impact of political instability on the Naira, with investors becoming hesitant to invest in Nigeria and causing capital flight.
External factors such as changes in oil prices and international trade policies can exacerbate the impact of political instability on the Naira. Therefore, individuals and businesses must take steps to manage exchange rate risks, This includes hedging or diversification.
In conclusion, political instability is a significant risk factor for the Nigerian economy, and it is essential to monitor its impact on the Naira. By taking steps to manage exchange rate risks, individuals and businesses can protect themselves from the negative effects of political instability and maintain stability in their financial affairs.