Dear subscriber,
Up and down like a Yoyo – the new Naira dance
In the month of April, the naira appreciated by 20.18% to N1,090/$ before moving to the other extreme of N1,450/$ in a period of one week. Investors and traders are confused as to the direction of the dancing currency. One minute, it is up; the next minute, it is down. The question is, what is responsible for this instability?
Yes, we know that currency markets are volatile by nature, but they should not swing this sharply in such a short period. Our view is that the naira’s value is reacting to what economists describe as the cobweb theory, where prices head toward equilibrium by overshooting and undershooting until it settles.
The question then arises: ‘Do we bet against the naira?’ In our view, one should not bet against any currency. ‘Do not try to catch a falling knife’. For now, the currency is in search of its fair value (equilibrium), which, according to the purchasing power parity, could be approximately N839.71/$. While the central bank governor disclosed that it is not using external reserves to defend the naira, we believe that central banks globally use their reserves periodically to defend their currencies. Hence, Nigeria should not have any apologies for using its reserves to defend its currency. What is more relevant is whether the net external reserves are adequate to cover 6 months of imports and payments. This is the level that gives the markets confidence in any currency. Meanwhile, expectations are that the US Federal Reserve will not be cutting interest rates anytime soon, implying that the dollar could appreciate, and thus put more pressure on the naira.
Music tourism, “an under-tapped goldmine” in Nigeria
Thinking outside the box is one way for policy makers to improve foreign exchange earnings further and diversify their revenue base. With an estimated market potential of $14bn, expected to grow at a CAGR of 9% between 2023 and 2033, musical tourism is an untapped opportunity for Nigeria. Positioned as the epicenter of Afrobeats, a burgeoning global music genre, Nigeria can reap substantial benefits from leveraging its musical prowess. Taking a cue from South Korea and the BTS boy band that contributed $4.9bn to the country’s GDP in 2019 and Brazil’s carnival estimated to generate $1.06bn in 2024 from tourism activities, Nigeria can drive revenue through its fiery music industry. The options are yet again to address safety and security concerns and develop adequate supporting infrastructure to build music tourism products like festivals.
In this latest edition of Whispers, the FDC Think Tank takes a deep dive into recent economic developments and their impact on your business and corporate strategy.
