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Much Ado About FX (Part III of III): Why Does It Matter?

If you are just joining the party, it will help to go through:

  1. What is an Exchange Rate?
  2. The Mechanics of the Nigerian FX Market

Now to the final part…  Meet the Wazobia family.

The Wazobias love the good things of life.  They are very exuberant – work a bit and party hard; some say they work to party :)!  They have a lot in their backyard, but they don’t produce much.  They have a lot of land and seeds, but they do not produce enough food to eat; they prefer to buy food and groceries from their neighbors.  They have a well of black gold, which they fetch from and sell to other families.  A lot of essential commodities can be extracted from this black gold, including the fuel the Wazobias use to generate electricity and power their vehicles and machines.  The Wazobias have not bothered to extract these by themselves; they find it more convenient to sell the black gold to their neighbors, and then buy these essential fuel commodities from their neighbors when they need them.  Every time the Wazobias produce something and sell to their neighbors (exports), they earn xZollers.  Every time they buy something from their neighbors (imports), they spend xZollers.  Doing business amongst themselves, they spend their local currency, the Waz.

This black gold was very expensive for most of the last decade.  Consequently, the Wazobias had been swimming in xZollers.  The Wazobias did not utilize these earnings to educate themselves or develop their capacity to: grow their own food, make their own tools, medically treat themselves, and produce their own fuel.  Instead, the Wazobias bought even more items from their neighbors, including basic grocery items.  Their neighbors loved them because of the amount of business they always brought.  The exchange rate between the xZoller and the Waz remained stable because every time a Wazobia needed to obtain xZollers to make a purchase of goods and services from their neighbours, no matter how frivolous the purchase, the xZollers were made available from the Wazobias’ large (and seemingly never-emptying) store of xZollers.

About 18 months ago, the fortunes of the Wazobias changed – the price of their black gold dropped!  It was not a small “don’t worry it is just a dip and will pick up soon” type of drop.  It was an over 70% decline over about 12 months, with 50% of the decline occurring in less than 6 months.  Remember that the Wazobias earned the bulk of their xZollers from this black gold.  As they had not invested in being able to be self-sufficient, i.e. produce things by themselves for themselves, the Wazobias found themselves in an unenviable position of having to still go to their neighbors to buy almost everything they need.  Now they needed a lot more xZollers than they could earn as they did not have much else to sell to their neighbors other than black gold.  As a result, it has become more expensive for the Wazobias to obtain xZollers as it has become rather scarce.

In order to conserve the few xZollers now available, the elders of the Wazobia family decided to impose restrictions on who could come and buy xZollers at a preset exchange rate (official market).  They pre-set the exchange rate so as to minimize the cost-increase impact (inflation) on the Wazobia family. There were other members of the Wazobia family (the Cartel) who had their own stores of xZollers obtained from various sources – some legal, some illegal.  The Cartel decided to capitalise on the scarcity of xZollers to make a lucrative market of their own (parallel market).  Some of the members of the Cartel were even able to access the official market; but instead of utilising the xZollers they obtained from there for the purpose they indicated, they placed them for sale in the parallel market.  As we all know, the scarcer an item is, the more expensive it will be; this is called the law of demand and supply.  Due to the restrictions placed by the elders, more and more Wazobias trooped to the Cartel to obtain xZollers to enable them keep up with the taste for their neighbor’s goods and services that they had grown accustomed to.  Not surprisingly, the parallel rate is now much higher than the official rate.

The Wazobias’ story is the story of Nigeria:  the black gold is our crude oil, the Waz is our Nigerian Naira, and we are currently an import-dependent nation.  The elders of the Wazobia family represent the CBN, and the neighbors are Nigeria’s trade partners.

If this series has served its purpose, then these news articles should be easy to digest :):

 

Were you able to make sense of the news articles?  Do you still have any questions about any aspect of the Nigerian FX market?  Got any recommendations on how the Wazobias can get out of this quagmire?  We look forward to reading from you: a comment in the box below or an email to comments@finomics101.com.

Happy new year all! “See” you in 2016 🙂

new-years-eve-in-riverside-pictures-of-fireworks

image courtesy happynewyears2016.net

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13 thoughts on “Much Ado About FX (Part III of III): Why Does It Matter?

  1. BeCauseWeCanBe

    Succint, digestible and very much needed. Now, you need to explore policy directions at national and individual levels to offer guidance to us all since it seems only The Cartel know what to do to prosper in this climate!

    Liked by 1 person

    Reply
      1. BeCauseWeCanBe

        Our country is spasming . No one knows what to do or not do. If you don’t already have a stash of, or aren’t earning foreign exchange, you are in trouble. If you’re spending it you’re in trouble. If you aren’t providing a critical product like food, you’re in trouble. If you are and your production requires inputs like machinery with a foreign exchange component, you’re in trouble. If you are a service provider to markets that are in the above categories, you’re in trouble. Until we hear something meaningful and different, we are all in trouble. ________________________________

        Liked by 1 person

  2. Naijamum

    Too bogged down with parenting to understand all these jargon coupled with the fact that I am currently out of the country and totally dependent on my Naira Master and Visa cards to survive so please ask the elders of the Wazobia family the way out. Thanks and a happy new year.

    Liked by 1 person

    Reply
    1. Bash B Post author

      Jargon ke?! *deeply hurt*
      Pele / Ndo / Sannu that you’ve gotten caught in the mix o… Solution may be to enter private market transactions with friends and / or family there o.

      Liked by 1 person

      Reply
      1. Bash B Post author

        Toh… No vex, I can’t think of any other way out for your scenario… Doesn’t look like they will be reversing these policies any time soon.

        Like

  3. Alem

    This is an excellent article which has explained in simplified terms the current situation we face now. Crude oil has been more of a curse than a blessing for us seeing that we have absolutely no source of alternative export and import almost every single product we use. Unfortunately we are in for tough times ahead except the ‘elders’ can proffer practical solutions.

    Liked by 1 person

    Reply
  4. ABdullahi

    I liked the idea of ‘xzollers, wazobia, waz, black gold, elders etc’ replacing the various concepts and participants in the Nigerian fx situation. It really put the matter and in perspective, separating the emotions around the matter today and how the various participants have contributed. The law of demand and supply remains in control afterall, which makes me wonder how long the elders of the Wazobia family can hold the xzollers exchange rate at a preset value?

    Liked by 1 person

    Reply
    1. Bash B Post author

      I’m glad it all makes sense ABdullahi.
      The general sentiment is that the elders cannot keep this up for much longer, but I think they can keep this up for as long as the Wazobias have xZollers at their disposal to continue the artificial support.

      Like

      Reply
  5. Pingback: Risk Management (Part I of II): “I should get insurance? Why?” | Finomics 101

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