ACCORDING TO BUSINESS ANALYSTS
In February 2024, the naira reached a record low against the dollar, trading at 1800 naira to the dollar, the lowest rate in recorded history. This economic situation placed Nigerians under significant hardship as the prices of goods and commodities skyrocketed overnight, with some increasing by 40% and others by 100%. Despite these steep price hikes, the upward trend persisted in the following weeks.
However, towards the end of March, there was a surprising turn of events. The naira seemed to regain strength, trading at 1500 naira to the dollar. The dollar continued to steadily decline, and by the last week of April, the exchange rate had improved further, with the naira trading at 1075 to the dollar.
Despite the recent crash of the dollar, prices of goods and services have not decreased as expected. Many Nigerians are left wondering why this is the case.
A business analyst and commentator on TikTok, known by the username @onlinebanker, sheds light on this perplexing phenomenon. According to his explanation, the reason behind the fixed prices despite the dollar crash lies in the market strategy employed by businessmen to avoid losses.
Let’s break down the concept using an illustration:
1. John’s Business: Imagine John runs a business. As the dollar-to-naira rate increased during the weeks of February, he adjusted the prices of his goods and services to reflect this change. This adjustment was necessary to prevent running at a loss, especially since the goods he sells are imported and rely on foreign exchange. Suppose the price of a single item he sells was increased to 100 naira to align with the current exchange rate of 1800 naira to the dollar.
2. Steady Pricing: However, as the dollar started to crash and weaken against the naira, John maintained the same price. Why? Because exchange rates fluctuate, and regardless of where the ball falls in the naira-dollar battle, he avoids losses. By keeping the price steady, he ensures that he doesn’t suffer when the exchange rate swings.
3. Competition: Now, consider another trader, Paul, who sells the same goods. Paul decides to price his items at 90 naira. Traders naturally gravitate towards Paul’s lower prices, forcing John to reevaluate his own pricing strategy. To remain competitive, John eventually reduces his prices as well.
4. Time Lag: The expected deflation of prices due to the dollar crash will take time. It depends on factors such as supply and demand for goods and services and the stability of the exchange rate between the naira and the dollar.
In summary, while the naira’s recent strength against the dollar is encouraging, the impact on prices may not be immediate. Business strategies, market dynamics, and consumer behavior all play a role in determining how quickly prices adjust to currency fluctuations.
