How information asymmetry leads to Nigeria’s Forex Fluctuations
Most of the shocks we had in our forex markets was due to information asymmetry.
The President, especially advisers didn’t catch foreign investors on time.
Nigeria had commodity shocks and everyone knows we are a monocultural economy, including investors.
The body language didn’t assure or discourage investors in our capital markets So what did they do?
They simply overshot the spot rate, which is the inter-bank official rates. In a risky markets like Nigeria, investors demand a default risk on their capital plus a risk premium.
In this case they over-compensated themselves through speculations that came because of shortage or no information from government. We had no ministers for a while and when we did, we didn’t have a clearly articulated policy that anyone can allay their fears.
Nigeria is a net importer which means that we demand more dollars than we supply naira. We don’t export per se. Import to export ratio is now 94.4 to 0.6. Law of demand and supply allows the dollar to appreciate, then when you add the information asymmetry which is still existent as Emefiele is pulling back and forth, you can see why the dollar is fluctuating.
A clear communication strategy should be designed that inspires confidence in our markets.
We were close to a recession and the ruling party created a propaganda machinery to show how profligate we were and how we had squandered dollars.
Please if you are an investor, won’t you ask for a very high premium or rates on your investments.
Even if we had to fight corruption openly, why not complement it with communication of economic direction.
Then lately, when we finally summoned competence to design a communication strategy, we called it “emergency powers” which created fear and received outlash.
Emefiele should stop the back and forth and inspire confidence.
Nigeria needs an airtight investor relations strategy. Many countries were showing Incredible India, Great Croatia, we were showing “Stealing Dasuki”.
Let’s get to work. Nigeria is a great country.