In many developing economies, exchange rate fluctuations serve as the main driver of inflation. In Nigeria, the value of the naira has a significant impact on the cost of goods and services. When the naira depreciates, the cost of imports rises, leading to an overall increase in prices. Unlike in developed countries where inflation is primarily driven by money supply and interest rates, Nigeria’s inflation is closely linked to exchange rate movements.
However, addressing the exchange rate alone is not sufficient to solve the problem. The root causes of the exchange rate issues must be tackled first. These include factors like the country’s trade balance, foreign reserves, and investor confidence. Without improving these fundamentals, any attempt to control the exchange rate will be short-lived and ineffective. A stable macroeconomic environment is essential for sustaining a favorable exchange rate.
The Central Bank of Nigeria (CBN) must focus on fixing these underlying issues before attempting to intervene in the exchange rate. Strengthening local production, reducing reliance on imports, boosting exports, and restoring foreign reserves will contribute to a more stable economic foundation. Investor confidence is also crucial, as inflows of foreign capital are necessary to support the naira and stabilize the economy.
If the fundamentals are ignored and short-term solutions are pursued, Nigeria could face even worse economic consequences. A stable exchange rate can only be achieved when these core issues are addressed, highlighting the need for a more comprehensive economic strategy rather than relying solely on currency manipulation.