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A Strong Naira is Both Good and Bad for Nigeria By Victor E. Dike
Everyone understands the importance of money, particularly, a strong currency. So, everyone pays attention to any discussion that involves money. Recently, the naira gained some strength relative to the dollar and other hard currencies, and Nigerians have since been savoring the “good news”. But some people, particularly those not knowledgeable in complex economic issues, may not understand the implications of an unrealistic strong naira. This article attempts to explain in elementary economic terms the implications of a strong and weak naira on the economy.
Social scientists, particularly economists, have vastly documented the factors that determine the value of a nation’s currency. According to experts,1 the myriad factors include a strong domestic financial market and a strong economy, ‘sound monetary policy aimed at price stability, lower inflation, higher interest rates,’ business cycle, political factors and ‘weaker foreign economy’ and of course the laws of supply and demand. For instance, if the demand for the naira is greater than the supply, the value goes up; but if the demand is lowers than the supply, the value drops, ceteris paribus!
Does Nigeria have the goods and services that to illicit and sustain global demand for the naira? A nation’s currency cannot be strong without economic factors. What forces then determine the health of a nation’s economy? Experts have also noted, among other things, that it is affected by the effectiveness of institutions and infrastructure, productivity of the labor force and quality of education, level of technology, governance, and political environment.2
However, both analysts and practitioners3 have noted that the naira suddenly appreciated because of the falling value of the dollar caused by the recent hiccup in the United States economy, especially in the real estate sub-sector. The naira exchanged for about 136/137 for per a dollar in 2005,4 but the rate appreciated to N124.75 for a dollar in September 2007 from N126.05 to a dollar for a dollar in June 2007.5 However, the exchange rate is currently hovering around N120 (or thereabout) per a dollar; and the average inter-bank interest rate fluctuated “between 6.0 per cent and 8.57 per cent since end-August, 2007”.6
As noted earlier, a “strong” naira sounds like “good news”. In fact, there is nobody in the world who does not want to have a strong currency in his or her pocket. But nothing in economics is that very simple; the unusually strong naira is a mix blessing-it is both good and bad for Nigeria.
Why then is a strong naira both bad and good for the weak Nigerian economy? Let us begin with the good news. When the naira is “strong”, the purchasing power goes up and one needs a relatively fewer naira to purchase the currency of other nations. In other words, the naira assumes a high exchange rate. A strong naira also makes imports less expensive and helps to keep inflation in check. For instance, a strong naira makes imported oil, rice, and cement cheaper. A strong naira is good news for Nigerians traveling abroad.
However, what does a strong naira mean to exporters and manufacturing industries in the society? A strong naira is not good for Nigerian exporters because it makes “made in Nigeria” goods and services expensive in the global marketplace. In other words, it erodes Nigeria’s global competitiveness. Crude oil from Nigeria would become more expensive in the foreign market, causing shortfall in revenue from oil. This applies to other “made in Nigeria” products. And a strong naira means added problem for Nigeria’s textile and leather industries that are struggling with poor quality products.
And this means lost of jobs in small firms and industries that depend on exports. Thus, a strong naira, which is a double-edged sword, would create some hardship for workers who would lose their jobs when their companies could not make money. It could also create some problem for Nigeria’s trading partners because since a strong naira makes Nigerian goods and services expensive rate of inflation might increase in countries that consume Nigerian products. In addition, a strong naira could make it “more difficult for foreign investors to provide capital”7 to firms in Nigeria.
A weak naira is equally good and bad for the economy. Why? Two or more things might happen when the naira is not strong. Imports could decrease because foreign goods and services would become very expensive; and this drives up price of inputs and higher inflation. For instance, imported oil (and other goods and services) could become expensive; and industries would pay more to replace their worn-out parts. This situation is not good for consumers as they normally bear the additional cost. Also traveling abroad becomes could become much more expensive. One would need a bundle of naira to purchase hard currencies.
A weak naira could reduce the sale of expensive foreign or imported products and forces some Nigerians to buy locally made goods and services. This is good for the local industries and farmers because foreign competitors could be priced out of the reach of many people. However, some rich Nigerians who have insatiable taste for foreign goods and services could still afford to buy foreign brands.
And a weak naira would make “made in Nigeria” goods and services cheaper in the global marketplace. This could mean increase in exports for Nigerian firms (if they have anything to export). The Nigerian crude oil could be cheaper for foreign consumers; and more barrels sold would translate into more oil revenue for Nigeria. Experts have noted export is about job creation; there could be more jobs, all things being equal, for the Nigerians who produce the goods and services.
As noted earlier, the naira has recently become stronger than its historic value. But making the currency artificially “strong” would not solve Nigeria’s problems. However, Nigeria does not need “too weak or too strong” currency; the society needs a stable currency anchored on a healthy economy and stable political environment. The economy lacks what it takes to sustain the current value of the naira against the dollar, the euro, the pounds sterling, deutschmark, and other hard currencies. The economy is not growing stronger with the unrealistic appreciation of the naira. When the economy is growing it can be seen - in fact, the people will feel it and “smell” it.
Nigeria has refused to avail itself of the opportunity to innovate and develop. The current rising price of crude oil (it has gone beyond $90 per barrel), which is determined by geo-political factors, will not last forever. If the revenues from oil are invested in the economy it could stimulate more economic activities, create jobs, and improve the value of the naira and the living conditions of Nigerians. Sadly, corruption has not allowed this to happen!
However, experts have noted that change in a society is directed by its economic goals and its value system. The political leaders of Nigeria should create a system that is “capable both of coping with change and inducing change”.8 Nigeria needs a government that will function effectively in solving its myriad problems through reasoned policies. The leaders should focus on creation of administrative efficacy, institutional effectiveness, stable polity, and on policies for sustainable economic growth. The naira cannot sustain its current value with the present political and economic uncertainty in the society. In fact, it is difficult for the economy to grow and for businesses to thrive in the present infrastructural challenges facing the country. Nigeria produces very few goods and services (if at all) that attracts the attention of other countries. With the United States’ strong economic base, it is certain that the US dollar will regain its value and the naira will assume its proper position. The naira will become stronger only when it is in high demand by the world to purchase “made in Nigeria” goods and services.
Notes:
1. Keith Feiler (n/d) -“Strong Dollar, Weak Dollar: Foreign Exchange Rates and the U.S. Economy” In On Reserve, a newsletter published by the Federal Reserve Bank of Chicago. Also see http://www.chicagofed.org/consumer_information/stron_dollar_weak_dollar 2. Victor E. Dike. Democracy and Political Life in Nigeria (2nd Edition) ; New York, Lincoln, and Shanghai: iUniverse, 2006 3. ThisDay- “Nigeria: Falling Dollar Good for Naira, Says IMF Chief” November 27, 2007 4. Richard Akinjide: “The naira, the US dollar, oil and the Nigerian economy: Nigeria’s foreign reserves is under-developing the state” (Vanguard, May 19, 2005). 5. BusinessDay: “CBN raises benchmark interest rate to 9%” (October 3, 2007) 6. The Guardian: “Our outlook for close of 2007 and beyond, By Soludo” (November 26, 2007). 7. Keith Feiler (n/d) Ibid 8. S.N. Eisenstadt: “Initial Institutional Patterns of Political Modernization,” Civilizations, XII, No.4, 1962. Also see Patterns Of African Development: Five Comparisons (ed. By Herbert J. Spiro), Prentice-Hall, Inc, Englewood Cliffs, N.J., 1967, p.65 Victor E. Dike is the author of Leadership without Moral Purpose: A Study of the Obasanjo Administration, 2003-2007 (Forthcoming).
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