Persistent swings and volatility of the naira exchange rate has worsened in recent time. It began a wild race on July 19, depreciating by 16% to N717/$ on July 28 before appreciating to N707 on July 29. Agusto & Co, in a report published recently, noted that long term inflation is one of the exchange rate stoking factors. 

Agusto & Co also opined that the differential between two countries’ long term inflation rate would be mirrored in the exchange rate depreciation between both countries. 

In other words, the long-term rate of inflation of the Naira compared to that of the USD plays a significant role in what the value of naira would be relative to the USD. 

Since the Naira has a higher long-term rate of inflation (12%) compared to the USD (2%), it is a weaker currency and will depreciate by approximately 10%. 

The report enumerated three major mechanisms for exchange rate determination, namely, pegged exchange rate system, floating currency, and a crawling peg. 

Even though each of the options has its own shortcomings, the report proposed that adopting a crawling peg option is more suitable for Nigeria. 

This allows the CBN to intervene in the market when rates are significantly higher or lower than its target.