In a recent interview with the BBC, President Buhari said: “I have asked the Central Bank Governor and others to sit and see if they can convince me to murder the Naira.” He also said: “Most of our young people can’t get jobs; one of the biggest dangers we face.” During the campaign that led to his election, the President’s party highlighted job creation as its major economic goal. In many discussions, a target to create 3 million jobs was promised, to ensure the bulging youth population is engaged in productive activities. If various estimates are to be believed, approximately 5 million Nigerians come into the workforce annually, yet in the same period, the country struggles to create more than 1.5 million jobs. This is why unemployment and underemployment in Nigeria are now 9.9% and 17.4% respectively. File photo: Unemployed youths at Alausa, Ikeja For Nigeria to meet its job creation target, the Government needs to solve the supply side challenges impacting the exchange rate in order to make the economy more competitive. How the Naira Lost its Shin The economic principle of demand and supply is simple. If demand for the Dollar increases in Nigeria, it becomes more expensive to “buy” Dollars, since this demand will create scarcity of Dollars. Also, if the supply of Dollars reduces, even if demand for it stays the same, a scarcity will occur, which will lead to a rise in the price of the Dollar. How does Nigeria fit into this narrative? In 2015 the official price for buying $1 was roughly N200. At this price, we are made to believe the demand for and supply of Dollars is at equilibrium. Since then, a number of things have happened to the supply of Dollars to Nigeria: Oil prices have crashed: According to the NBS: “in Q3 2015 Nigeria exported mainly mineral products, which accounted for 86% of total exports.” This means crude oil accounts for over 80% of all exports and remains Nigeria’s foreign exchange earner. So, the drop in oil prices has reduced Nigeria’s foreign exchange earnings by almost $50 billion; ouch. Non-oil exports are struggling: At a conference organized by the CBN and the Nigerian Export-Import Bank (NEXIM), the CBN Governor said non-oil exports dropped from $10.5 billion in 2014 to $4.4 billion in 2015. If the Naira is over-valued, exporters don’t have an incentive to bring their foreign currency proceeds back to Nigeria. So, non-oil export earnings dropped by $5 billion in one year; ouch. Foreign investment is shrinking: According to a Nigerian Capital Importation Report recently released by the NBS: “The total for 2015 was recorded at $9,643.01 million. This represents a 53.53% fall on the previous year, when the total was $20,750.76 million. So, foreign capital invested in the Nigerian economy dropped by $11 billion in one year; ouch. The combination of these events means foreign exchange supply in Nigeria has dropped by over $60 billion in one year. To minimize the impact of the drop, the CBN responded by spending almost $11 billion of its reserves to defend its reserves; and when it realized the ineffectiveness of that decision, it decided to manage the demand for foreign exchange with several short-term policies. But the laws of demand and supply don’t change overnight. If the supply of a commodity, in this case, the Dollar, drops by almost 50%, then the price of the product will rise. This is why despite the CBN’s best intentions of pegging the exchange rate, most Nigerian businesses now buy the Dollar at N300 on the Black Market, a 50% premium compared to the official rate. This reflects the decline in supply, and follows standard economic principles.