Naira’s exchange rate despite being of huge interest to Nigerians is not the only indicator of the state of the country’s economy. Focus, instead, should be on what steps the country is taking to achieve sweeping economic reforms, fuel productivity, innovation, and exports, that can pave the way for Nigeria’s enduring economic vitality.
On Thursday, 12 October, the Central Bank of Nigeria (CBN) issued a memo unbanning the 43 items initially prohibited from receiving forex through the official market. In their statement removing the ban, the CBN said that these restrictions had compelled importers to resort to the parallel market, creating additional demand for foreign exchange. According to the apex bank, this demand has increased the difference between the official and black-market rates. The explanations offered by the central bank are astonishing, particularly when you consider that even companies seeking foreign exchange for items not restricted by the list of 43 prohibited items cannot get dollars through the official market.
The CBN hopes that, somehow, the main issue of the exchange rate, liquidity, will be solved by this move. The apex bank seems to focus on something other than the supply side of the issue but is concerned about the symptoms of the problem. One wonders why the CBN is bothered by the exchange rate at the parallel market if it can provide liquidity for those seeking dollars through the official market. Even in cases where there is round-tripping, with adequate supply, the difference between the official and black-market rates will reduce, and the incentive to sell to the latter will diminish.
Nigerians, like their government, seem overly concerned about the exchange rate and tend to use the number as a metric of a strong economy, and this begs the question, why? The exchange rate is less critical than it is often made out to be.
UNDERSTANDING EXCHANGE RATES
The Nigerian fascination with the naira’s exchange rate to the US dollar is deeply rooted in the nation’s history and economic experiences. Over the years, this exchange rate has often been considered a reflection of the country’s economic well-being, and its fluctuations are often seen as a gauge of Nigeria’s economic health. However, it’s crucial to re-evaluate this perspective. Nigerians need to understand that while the naira’s exchange rate, though captivating, might not be as essential as we commonly believe. This obsession with exchange rates sometimes obscures more significant economic realities. Paradoxically, a strong Naira can sometimes hinder, rather than promote, economic development.
Exchange rates are like a mix of factors that determine the value of a country’s money. These factors include things like how much money is in the country’s foreign reserve, how much debt the country owes, how fast prices are going up (inflation), whether the nation is buying more from other countries than it is selling (current account deficits), how much people trust the country’s economy, how much people are betting on the currency (speculation), the difference in interest rates with other countries, how stable the government is, and how well the overall economy is doing. All these factors mix to determine the exchange rate, which is the value of the naira compared to other currencies like the US dollar. So, it’s not just a simple number; it’s like a giant recipe with many ingredients.
THE ALLURE OF A STRONG NAIRA
The allure of a strong local currency, symbolised by a low naira-to-dollar exchange rate, is deeply ingrained in our economic thinking. People often equate a strong naira with prosperity. However, this notion can be misleading. To grasp this concept better, let’s look at a contrasting example: Nigeria and South Korea, two countries at almost similar economic levels in the early 20th century. Since the mid-20th century, these countries have ended in opposing situations. In 1980, while one dollar was exchanged for 580 Korean Won, it traded for 55 kobo. As of this writing, the naira remains stronger than the Korean Won (1NGN=1.5 KRW), but Nigeria lags significantly in living and GDP per capita.
This contrast illustrates that the strength of a currency alone does not dictate a nation’s economic prosperity. A strong Naira can distort the economic landscape, making locally-produced goods more expensive and less competitive in international markets. South Korea, despite its weaker currency, has thrived by focusing on exporting a diverse range of finished goods. This export-driven strategy has been the bedrock of South Korea’s remarkable economic growth and improved living standards.
Furthermore, if we examine the experiences of other countries, we can see that currency devaluation has been used strategically to boost exports. China and Japan, for instance, have actively pursued devaluation policies to make their goods more competitive in international markets and demand, thus increasing general exports for these countries. This demonstrates that genuine economic development hinges on multiple factors, including productivity, industrial strength, and a commitment to export-driven growth rather than a singular focus on exchange rates.
THE IMPORTANCE OF DOMESTIC EXPENSES
The everyday expenses of the average Nigerian offer a crucial perspective that often goes unnoticed amidst the clamour surrounding exchange rates. It’s important to emphasise that Nigerians predominantly transact in naira, not dollars. More than half of an individual’s typical spending in Nigeria is allocated to fundamental necessities such as food and accommodation. These expenses are inherently domestic, supporting goods and services produced within Nigeria’s borders.
When we discuss the concept of a ‘strong naira’, we’re talking about a situation where fewer naira can purchase significant goods and services. At first glance, this might seem advantageous, but the reality is more nuanced. A strong naira might make it challenging for local manufacturers to compete globally because their products become relatively expensive for foreign buyers. This dynamic can affect job opportunities and, ultimately, the overall economic well-being of Nigeria. Therefore, while the appeal of a strong naira is understandable, it’s essential to recognise that it’s just one piece of a larger economic puzzle. An exclusive focus on exchange rates fails to acknowledge the intricate relationship between your currency strength, the daily cost of living for the people and the appeal of foreign goods. Consequently, the exchange rate discussion mustn’t overshadow the significance of reinforcing domestic industries and ensuring that vital goods and services remain affordable for most Nigerians.
NEEDED ECONOMIC REFORM
To truly unlock Nigeria’s economic potential, we must shift our focus from a myopic obsession with exchange rates to a broader and more strategic approach through economic reform. This shift is not just about altering one piece of the puzzle; it’s about redesigning the entire board to ensure that the game of economic development is played optimally.
Economic reform entails a comprehensive transformation of Nigeria’s economic landscape, considering various facets of the economy, including policy, regulation, and investment. The Nigerian government must steer its efforts toward initiatives that boost business productivity and foster an environment where innovation can thrive. The export of goods to international markets is made more accessible.
At the heart of these reforms is the concept of encouraging and nurturing industries that have the potential to create jobs and produce goods and services that can compete on a global scale. It means recognising and supporting sectors where Nigeria has a comparative advantage, be it in agriculture, manufacturing, technology, or services. These reforms should encompass investment in infrastructure, education, and research and development, ensuring that the workforce is equipped with the necessary skills for future industries.
Economic reform is about breaking down barriers that hinder business growth and innovation. It’s about streamlining cumbersome bureaucratic processes and regulations, making it easier for entrepreneurs to start and scale their businesses. It’s about providing access to financing for small and medium-sized enterprises, the backbone of many thriving economies. It’s about fostering an environment that incentivises companies to invest in research and development, creating cutting-edge products and services that can be marketed globally.
Moreover, these reforms extend to the realm of trade policy. They involve creating conditions that facilitate exports and protect domestic industries when needed. By pursuing such reforms, Nigeria can become a more attractive destination for foreign investment and promote the growth of a vibrant private sector.
While deeply rooted in our economic history, the fascination with the naira’s exchange rate must be questioned. The naira’s exchange rate is not the sole indicator of our nation’s economic well-being. A strong naira can sometimes obscure more profound economic challenges that hinder economic growth. The case of South Korea’s weaker currency but higher living standards and GDP per capita illustrates that true prosperity is built upon a holistic approach to economic development.
Nigeria’s economic policy managers must move beyond the fixation on exchange rates and push for more fundamental economic reforms that lay the foundation for enhanced productivity and increased exports, leading to a more prosperous and sustainable economic future⎈
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