Understanding How Covid-19 Impacts Forex Trading in Nigeria

2020 will be remembered as a year in which a global pandemic struck the world adversely affecting virtually all aspects of our lives. The Coronavirus disease 2019 (COVID-19) is an illness that is caused by severe acute respiratory syndrome Coronavirus 2 (SARS-Cov-2) which can spread from one person to another.

The outbreak started in Wuhan, China in December 2019 but within a few months, it spread to over 200 countries and has so far killed over a million people. To curb the spread of the deadly virus, several governments resorted to partial or total lockdown; where offices, businesses, schools, etc remained closed and people were asked to stay at home.

In addition to the sicknesses and deaths, the effect of the COVID-19 pandemic has been disastrous to the economy of several nations. With economic activities paralysed and over a third of the world population forced to stay at home, the virus has engendered a global recession and even depression in several countries.

For instance, weekend sporting activities which generate millions of EUR in Europe and a few other countries were suspended as no gatherings were allowed within the lockdown period. Several countries, especially offshore nations, that rely heavily on tourism, are still experiencing a bearish economy.

COVID-19 in Nigeria

In Nigeria, the first case of COVID-19 was confirmed in February 2020 in Lagos; the nation’s commercial hub and the city with the highest population density. The virus quickly spread round the country. From March to September 2020, several cities were partially or totally locked down. Offices, banks, schools, religious houses, markets, airports, etc were closed and economic activities were reduced the barest minimum.

The economic impact was horrible; many companies could not pay salaries, so staff were laid off and/or salaries slashed. Inflation, hunger and crime prevailed. The informal sector, which accounts for 65% of all economic activities (according to IMF), was the hardest hit. There was a short supply of food items and consumer goods leading to an increase in prices.

The Impact on Forex

Prior to COVID-19 lockdown in Nigeria, the Nigerian Naira (NGN) was already under pressure due to declining crude oil prices occasioned by the Russia-Saudi Arabia oil price war. Consequently, naira depreciated against the dollar (USD) and other popular currencies like EUR and GBP. Crude oil is the nation’s main export commodity and her major source of income.

Also, Nigeria is a consuming economy as major raw materials, finished products and virtually every household item is imported. The National Bureau of Statistics (NBS) has reported a decline of 6.1% in the nation’s Gross Domestic Product (GDP), year-on-year, for the second quarter of 2020. Experts believe that the country may enter her worst recession in 40 years.

The Central bank of Nigeria (CBN) has been struggling to manage the value of the naira. So far in 2020, the apex bank has devalued the naira twice. The first devaluation was in March 2020 from N307/$1 to N360/$1 and again in August 2020 from N360 to N380 per USD. Repeatedly, the CBN has spent billions of USD selling funds to Bureau de Change (BDC) operators in order to ease the pressure and demand of foreign currencies especially the USD.

The nation’s foreign reserves have also steadily declined when compared to the previous year hitting an all time low in April 2020. The currency parallel market has been exchanging at an average of N450/$1 and it fluctuates daily because it is the main source of Forex for importers, online businesses and even Forex traders.

Impact on the Stock Market

The COVID-19 pandemic caused a crash in the global stock market and Nigeria was not left out. The Nigerian Stock Exchange (NSE) closed its trading floors and sustained online remote trading of stocks and other securities. In the ‘2020 first quarter fact’ sheet published by the NSE, the All Share index was down by 31.38% and the equities market capitalization dropped by 4.85%. All the sector indices were equally negative when compared to previous values. The second quarter recorded small improvements but further recovery is expected in the near future.

It Wasn’t All Bad

Perhaps on a brighter side is that the COVID-19 lockdown saw an increase in the use of technology in Nigeria and Africa at large. For the first time, several companies, schools and offices started working from home. Individuals, who had nothing to do at home, started looking for online jobs.

Many took to Forex trading as the Nigerian-based Forex brokers stepped up their radio, TV and social media advertisements portraying Forex trading as a quick fix to all financial woes. Sadly, several new forex accounts were blown.

With the phased ease of the lockdown in the last stages, the stock market and economic activities are gradually picking up. Analysts believe that a recession is imminent and recovery might not be soon. 

Though, unemployment and inflation continues to ravage the nation, the people are gradually adjusting to the new normal. At this juncture it is difficult to predict what will happen in the Forex and stock market in the near future, we’ll have to wait and see.

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