How To Determine Nigeria Banks Exchange Rate – Exchange rate makes it possible to convert domestic currencies into foreign currencies as these foreign currencies are needed to carry out international trade by residents of the country.
Exchange rate is the price of one currency in terms of another currency. It is the value of a nation’s currency against the currency of another nation.
In this article, we will be talking in details about the exchange rate in Nigeria and how to determine the Nigeria banks exchange rate.
What Is Exchange Rate?
This is the rate at which one currency is exchanged for another currency. It is the current market price for which one currency is exchanged for another. The exchange rate is normally seen as how many units of a currency that will purchase one unit of another currency.
The exchange rate plays a vital role in the economy of every country because of its role in international trade which plays a large role in the economy.
Exchange can affect the prices of imports and exports in the country because when of the country’s currency which is Naira falls, importation of goods becomes expensive and this will reduce the volume of imported goods in the country and exportation becomes cheaper as other countries will pay less for the goods we export and this will certainly increase export sales.
Also, when there is an increase in the value of Naira, importation becomes cheaper and exportation becomes more expensive as countries will have to pay more for goods that we export which will lead to a fall in export.
The Central Bank of Nigeria is in charge of maintaining the stability of the Naira exchange rate in the country.
There are two types of exchange rates and they are the official exchange rate and the market exchange rate.
The official exchange rate is determined by the Central Bank of Nigeria (CBN) while the market exchange rate is determined by the market forces of demand and supply.
Forms Of Exchange Rate
Cross Exchange rate
This is the exchange rate between two currencies to a third currency. It is the exchange rate between two currencies expressed in terms of the exchange rate between them and a third party.
End-Period Exchange Rate
This is the final exchange rate prevailing at a particular period. It is the exchange rate ruling on the final business day of a given period and it could be weekly, monthly, quarterly and yearly end-period exchange rates depending on the frequency.
Average Exchange Rate
This is more like the arithmetic average of the daily and monthly exchange rates at a given period. This exchange rate is determined by dividing the sum of the exchange rate by the number of units that make up the period. Take for instance; we have 30 days in a month for the monthly average exchange rate or 12 months for the yearly average exchange rate.
What Is Exchange Rate Premium
This measures the spread between the official market exchange rate and the Bureaux de Change (BDC) rate. The exchange rate premium is measured by the difference in the official and inter-bank market exchange rates.
The Exchange rate premium helps to assess the stability in the foreign exchange market and it is not expected to go beyond 5% as this shows that the foreign exchange market is stable.
What Is Appreciation And Depreciation Of The Exchange Rate?
Looking at the exchange rate of Naira, if the amount of Naira required to buy a foreign currency falls, then we will say that Naira has appreciated against these currencies. This shows that Naira has increased in value.
When the amount of Naira required to buy a foreign currency rises, then it can be said that Naira has depreciated showing that it has loss value against foreign currencies.
Appreciation is caused by an increase in the demand for a domestic currency (Naira) or a decrease in its supply while depreciation means a decrease in demand for a domestic currency (Naira) or an increase in supply.
So in a nutshell, we would say that the market forces of demand and supply determine the value of the exchange rate.
Volatility Of The Exchange Rate
The exchange rate changes regularly either in minutes, hours, or days under a floating exchange rate regime. When there are large changes in the exchange rate over a period of time, there is said to be volatility of the exchange rate.
The volatility of exchange rate is the measure of the degree or frequency by which the price of the foreign exchange changes over time. The larger the extent of the change in price or the speed at which it changes over time, the more volatile the exchange rate is.
Volatility of the exchange rate causes panic in the foreign exchange market as traders and investors in the market do not know what to expect in the market on a daily basis and they can either loss they money or gain more.
The CBN of Nigeria helps to control the exchange rate volatility and also reduce the panic in the foreign exchange market.
Factors That Determine The Exchange Rate
The value of exchange rate is not only determined by the factors of demand and supply as there are some other factors that play a role in determining the exchange rate in Nigeria and they are:
Inflation is the continuous rise in the prices of goods and services in a country and it is the relative purchasing power of a currency compared to other currencies. Some countries could buy a particular item for just a unit of their currency while some other countries could buy that same item for thousands of units of their currencies.
The difference in inflation is a determinant of exchange rate as it shows the difference in purchasing powers and currency rates too. So a country like Nigeria that is has high inflation rate will certainly have a lower currency value compared to countries like the U.S. that have stronger currency as a result of low inflation.
Nigeria finances its budget by taking large-scale debt from international bodies and other countries. With this, it can be said that the country borrows to finance economic growth and if the public debt exceeds the economic growth of the country, it will lead to inflation and loss of value of the country’s currency.
Even if the government decides to print money to finance debt, it can also lead to inflation as there will be too much money in circulation chasing fewer goods.
A country that has a stable government will certainly attract more foreign investments which will increase the value of the country’s currency against foreign currencies.
Countries with political stability tend to have stronger currencies unlike countries with political instability.
Balance Of Trade
The balance of trade is the difference between a country’s imports and exports. A country is said to have a positive balance of trade when the exports exceeds the imports and in this case, there will be a high inflow of foreign currency than outflow which will lead to increase in foreign exchange reserve.
When there is an increase in foreign exchange reserve, it will strengthen the value of the local currency and promote economic growth.
The economy of a country will determine the exchange rate of the country. For instance, a country with low unemployment rate means that there are job opportunities in the country and this will certainly improve the standard of living in the country.
A country with high standard of living will experience low inflation rate and have stronger currency value.
The Central Bank plays a major role in determining the exchange rate of the country as they use different monetary policies to help regulate the foreign exchange market to ensure that there is a stable currency exchange rate.
The CBN is directly and indirectly involved in watching the activities in the market and it always intervenes when necessary.
It issues license for authorized dealership in foreign currencies only to banks and BDCs.
The national currency of any country is used to make and receive payments within a country and to trade internationally, foreign currencies are to be used and this is where the knowledge of exchange rate comes in.
This article was written to give you an insight on what exchange rate is and how to determine the exchange rate in Nigeria.