During Economic Growth and Economic Recessions the Naira depreciates, Despite recording an average economic growth of 7.1% from 1999 to 2010, a GDP growth from US$59.37 billion to US$361.45 billion (508.8%) the Naira still depreciated from an official rate of N21.89 to about N150 (585%).
Today the official exchange rate of the Naira is about N411 due to the slow economic growth and recession, the only deference is the rate of depreciation. During Economic growth the rate of depreciation is slower than when the economy is in recession, and the reason is when the economy is booming and Nigerians are making money they switch to luxury goods which also puts pressure on the Naira. The only way to curb the continuous depreciation of the Naira is through industrialization and hard-line economic and social policies!
Nigeria’s Economy is a combination of what you call a Free Market Economy and a Command or Control Economy. Most countries of the world have a degree of both but it depends on which is higher. This is why the Heritage Foundation and Wall Street Journal carries out the annual Index of Economic Freedom to measure the degree of Economic Freedom or how free an economy is in every country. Nigeria Scored 105 in the 2021 ranking out of 178 countries with an average score of 58.7, meaning Nigeria’s economy is mostly unfree and remains the 105th freest economy in the world.
In a Free Market Economy the economic system which is based on supply and demand has little or no government control…..it is a system that is entirely controlled by demand and supply from buyers and sellers…….the markets determine the exchange rate. Whereas in a Command or Control Economy the government controls the means of production and the distribution of wealth, the government dictates or pegs the prices of goods and services and can also fix the wages workers are paid.
So in pegging the Naira against other currencies, the CBN is basically controlling Nigeria’s currency rate by tying it to those countries’ currencies. This is an example of a Control and Command Economy where a controlled monetary policy in forex trading is aimed at making the exchange rate constant and stable. Most economies in the world actually favour a pegged exchange rate.
While the CBN policies promotes a Control and Command Economy like Nigeria has always done in its forex monetary policies, countries in the category of Nigeria that peg their currencies do so not to strengthen them….but rather to keep their currencies weak to increases exports as their goods and services become cheaper …..the problem here is that the CBN is not pegging the Naira as a weak currency. In pegging the currency and trying to keep it strong….import increases as in the case of Nigeria that is a non-productive economy which further puts pressure on the dollar reserve. A country like China continues to peg and keeps its currency low to increase export, this is why the United States always accuses China of manipulating their currency.
While there are advantages to pegging a currency like supporting economic growth and rising standard of living, protecting a nation from volatility in its currency exchange rates and reducing the risk of currency crises, a major disadvantage is that the CBN will need a large Forex Reserve and must buy and sell the Naira in the open market to make sure the value of the Naira remains pegged to the value of the forex to make a pegged exchanged rate work, and this is where the major problem lies…….with a rising demand for forex and the CBN unable to meet demand through its monetary policy of a Control or Command Economy, Forex traders like Abokifx moves in to fill the gap and will operate within the confines of a Free Market Economy where demand and supply determines the rate.
Despite the clamp down on Abokifx and the CBN’s pegged policy, the Naira has not gained against the dollar, until the CBN has the kind of Reserve to support its policy, the Free Market Economy will continue to determine the strength of the Naira.