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Foreign currency

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  • Chapter 4: The Global Economy/
  • Economics real world examples and extension material /
  • Foreign currency

Cryptocurrency in Nigeria:

In March 2019 the Nigerian government banned access to foreign exchange for textile businesses. This put textile manufacturing firms in Nigeria in a tight spot because they could no longer get the Chinese Yuan they require to pay for imported textile materials to produce their goods.

Some of these importers turned to the cryptocurrency bitcoin as a way of paying their suppliers in foreign countries. It was a solution and it seemed to work.

Nigeria is now one of the leading bitcoin trading nations in the world with $2.5 billion of the cryptocurrency being traded officially. The true value of bitcoin trading is likely to be much higher as so many digital currency transactions are unrecordable.

A range of factors is fuelling the rise in cryptocurrency trading in Nigeria such as political influence on foreign exchange markets, government repression of businesses and rising inflation. Bitcoin can be used by businesses and individuals to manage these problems.

A similar rise in cryptocurrency trading is being played out in economies all over the world and governments are struggling to react to the rise of digital currencies and how to control them. Egypt, Turkey, and Ghana are all trying the regulate cryptocurrencies in their economies.

For many people, digital currency is very difficult to understand and appreciate as anything more than another asset going through a speculative bubble. If you held $1000 of bitcoin in 2016 it would be worth $58,000 today. This is also a currency that is so volatile that it can rise or fall by 20% in a very short space of time. But if a system of digital currency offers individuals and businesses in developing countries a way around the trading challenges they face and allows them to flourish it could be a significant monetary factor in facilitating economic development.

Questions

1. Explain why the Nigerian government might be limiting access to foreign currency for its businesses.

The reasons might be:

  • To reduce the quantity of imported goods and managed a current account balance of payments deficit.
  • To stop the value of the Nigerian Naira depreciating on foreign exchange markets.

2. Explain how the use of cryptocurrency might help importing and exporting businesses in ELDCs.

It gives businesses that trade access to a currency that can be used to buy and sells goods and services. This might be important when governments restrict access to foreign currency.

3. Discuss the problems importing and exporting businesses might face when using cryptocurrency to buy and sell goods and services on international markets.

The problems might be:

  • The value of cryptocurrencies can be very volatile which increases the risk of using them for international trade.
  • Governments might restrict access to cryptocurrencies or even make their use illegal.
  • Some businesses involved in international trade might be reluctant to use cryptocurrencies.
  • Because cryptocurrencies are not backed by governments and central banks it reduces their acceptability in international markets.

Evaluation might include discussion of the benefits of using cryptocurrencies if their value stabilises and they become an established method of transaction for international trade and are widely accepted by businesses and governments.