This is in regards to Nigeria’s currency (Naira) weakening and causing the ‘dollar shortage’ in the country to deepen.
In: Economics
That’s basically a symptom ot trust being lost in the Naira.
Imagine you’re in Nigeria, you have some wealth, but it’s in Naira, and you suspect they Naira might collapse. You then try to exchange it for a currency you trust more, for example USD. Now, you’re not the only one doing this of course, so USD get scarce and increase in value compared to Naira.
This behavior speeds up, or even causes, the fall of the value of the Naira, and as more people notice, more try to get rid of their Naira for something valuable before it lost ALL it’s value
People don’t want Naira they want dollars. They can’t afford dollars because nobody wants to give them dollars in exchange for Naira.
The dollar is a US currency. It can only be legally issued by the US. So people in foreign countries or foreign governments that want US dollar either have to borrow it or earn it by exchanging goods and services with someone who has US dollars.
Most countries issue their own currency. However where the people and businesses of that country no longer trust the government of that country, they may prefer to hold and trade in another country’s currency (the US dollar is a common one). This poses a problem especially if too many people refuse to trade in that country’s currency – essentially there is simply not enough of foreign currency in that country to allow for effective trade.
Imagine you run a bakery and can bake 100 loaves of bread a day. But now you feel the Naira is too unreliable and refuse to accept it in exchange for your bread. What can happen is that instead of baking 100 loaves, you only bake 50 loaves because you know that only 50 people have the currency you want (US Dollar). This reduces your output but if this happens all over the place, then the output of the entire country reduces and this can cause enormous hardship since people without dollars cannot buy bread.
If someone wants to import goods, their problem will be that no seller accepts the Naira and only want dollars. They may be forced to borrow dollars in order to do the import but this also means they need to generate enough income in dollars to repay their debt. The dollars may not be available.
If people in a country don’t trust their native currency to hold value, they try to get currency that does hold value. The USD for better or worse is a sort of a global trade standard currency, so it is often desired. However, the Nigerian government can’t print USD, so only USD coming into the country via some other means can be circulated. It is possible to have more demand for the dollar than supply.
US dollars are trusted money all over the world. If you pay for something with US dollars, people know that that money won’t become suddenly worthless in a month or a year or the like. People freak out when the US dollar *briefly* has 8% inflation, not because that is actually crazy bad (it isn’t *good,* but it isn’t horrible either), but because it’s *weird,* USD are normally very stable.
Many other countries do not have a stable, reliable currency. Their currency is weak. Maybe it’s untrustworthy, maybe the government prints bad money, maybe there’s a counterfeit problem, maybe the government itself is unstable, etc. Whatever the problem, the money isn’t good money. As a result, people want to get good money they know will hold onto its value…and as stated, everyone sees USD as good money.
This means people will try to get rid of their bad local money and pick up as much good USD as they can, which will suck up all the USD out of the economy, and leave only the bad money moving around. This exacerbates the badness of the bad money and artificially inflates the value of the good money, creating a death spiral for the bad money.
One thing not really touched on by other commenters is the import aspect. People bringing in goods want to be paid in something at least sort of stable. Plus something that’s easy to exchange. Nobody outside of Nigeria wants Naira, but everyone will trade in dollars. So if an importer is bringing in a load of steel, they want to be paid in dollars. But it is hard for the company buying the steel to get dollars, since there are fewer in the country that the demand for them. So they have a shortage.
Before dollar, the “most stable good” was gold. Having gold, knowing it will always have value, allow you to do a reserve and you’re 100% sure that it won’t shrink. It was used as a reference that never move (having a moving reference is quite useless right?).
But gold is limited, and for some other reasons it have been decided to get rid of gold as a reference: currencies will have exchange rates between other currencies, and that’s it. BUT, US being very stable as well as ruling over the world, dollar was “gold-like” and still is. There is also a cheat code that makes US able to print money without many consequences.
So other countries want a reserve in “stable money” aka dollar. So they buy dollars to US, or sell goods to US (or other countries, keep reading) in dollars and keep the money in dollar. Also, dollar is accepted from anyone: you want to trade in Naira? nop, do it in dollars.
So when a country don’t have any dollars…they can’t access international market, they can’t issue dollars to people, and it’s really a shitty moment.
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