Naira Vs Dollar

Naira Vs Dollar: Have We Missed The Point?

Eleanya K. Nduka

A friend asked me to analyze the state of the Nigerian economy as an economist. Initially I told him off because I'm only a spectator. However, after much contemplation, I decided to write an impromptu essay. From the look of things, it seems the economy is headed towards that of Greece.

But what is the problem? Anyone who took elementary economics at secondary school level knows that the scarcer a commodity, the more value it will have.

Nigeria has shut every avenue for free flow of the US dollar. This maybe in a bid not to dollarize the economy. However, the more they close every avenue for the free circulation of the US dollar, the more it will appreciate against the naira. Why cocaine is very, very expensive is because it is not allowed to flow easily. As a result, its price is determined by the degree of risk involved in smuggling it. That is the case with the dollar in Nigeria. Some months back devaluation of naira was the issue in every national daily. Some were in support of it, while many vehemently opposed it. Even those who do not know how the economy works.

The apex bank adopts a managed float exchange rate system. That is, a system partly determined by the “invisible hand” (forces of demand and supply) and partly by the central bank (visible hand). This means that the apex bank does not have 100% control over the exchange rate (but I doubt if it is the case now).

Lest I forget, permit me to explain what devaluation is supposed to achieve according to economic theory. It is meant to make import dearer (costlier), while export becomes cheaper. So with few dollars, the United States can buy plenty goods from Nigeria, while it would take huge sum for Nigeria to buy from the US. But Nigeria cannot fully exploit the benefit from devaluation because it is a mono-economy (crude oil-based economy). I guess you are following?

Because the United States is one of Nigeria's major trade partner (Nigeria exports crude oil to US and imports refined petroleum products from her), it can control the sub-structure (economic structure upon which the super-structure, that is, political structure is built on) of the Nigerian society. It is said that he who plays the piper dictates its tune. It is not out of place if one assumes that the relationship between the two now is retaliatory. Often times, countries use economic policies to punish one another. This is because the world economies are interconnected through globalization. So it is possible for Nigeria to catch cold when US sneezes.

As I write this, one dollar exchanges for about 300 naira in the parallel market. Prices of goods and services have tripled, especially those that are imported. Yet, it is likely that the naira will depreciate further against the dollar. The problem now is that many are experiencing "money illusion" (when you are happy because you have plenty amount of money, but will cry when you go to the market). Today, people go to the super market with money in their basket, but come back with goods in their pocket. But the reverse was the case in the time past.

Someone might ask, what is the solution? Some have said that diversification of the economy is the solution. Meanwhile, my colleagues in the social sciences will argue that corruption is the “oppressor” of development in Nigeria. So to them, no matter the level of diversification, once there is corruption, there will be no progress. The two will cancel out each other in the long-run.

But may this one fact not escape our memory that one cannot make sound economic policies from the outside without being involved. The economy works in opposite direction to economic theories. What we read in theories are different from reality. This is because every economy is unique. Adopting policies based on economic theories developed by advanced economies can hurt a small open economy like Nigeria. The people's attitude is a major factor to consider too when making economic policies.

Mr Nduka is a researcher and policy analyst based in Nigeria.