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 (2^nd 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).

Robot  Villager

# 1 var sbtitle1001=encodeURIComponent(A Strong Na...Read the full article. Posted by Robot| 22.12.2007 18:58

Zanubia Wolf  Villager

# 2 One would agree that the current appreciation of the Niara is by accident rather than design! From my observation the Manufacturing industry in Nigeria makes up only 0.001% of or Gross GDP, so we have next to nothing to export!! and Understandably we have a weak economic structure brought about by various factors On the Other hand our Raw Material /Crop EXPORTS; Crude, Coaco, Tea, Soya beans etc is on the rise so a stronger Nira would be good, if our commodities were even traded in traded in Nira in the fist place. A stronger Nira as you rightly stated would give us Stronger purchasing power I feel a strong Currency is Good however it will take astute monetary diligence and truth of purpose to implement and maintain Posted by Zanubia Wolf| 23.12.2007 15:22

ajis15  Villager

# 3 A country that does not export manufactured goods and has no competitive edge in the world market does not weaken her currency. So, to a larger extent, a strong Naira is good for Nigeria because she rely greatly on imports to sustain her local industries that produces soley for the local market, so a strong naira will reduce inflation. I need to correct your view on weak naira translating to Nigeria export, such as oil, being more attractive. This is wrong. Oil is denominated in dollar not Naira. So we get paid in dollars for our oil. This also extend to agric produce like Soyabeans and Cocoa. So if we get paid in dollars for most of the thing we have competitive edge, there is no incentive for us to delibrately weaken our currency. We can hold on to the dollar from these exports and use to to procure our imports. We do not need a weak Naira. Rather, we need a strong naira to contain inflation given our relative dpendency on the world. We are a net importer. The IMF voodoo economist that encourage us to weaken our currency is misguided. We all witness what happened to our country and economy in 1985 (and thereon) when IBB accepted the voodoo theory of weakening the naira. The inflation went up the roof. Our country became dumping ground for almost everything while our local industry suffer. The could not afford to maintain their machines, the cost of source input for their factories went up so high that they have to close shop. The pay structure could not cope with the inflation. It was a total mess then. Just my two cent. Posted by ajis15| 24.12.2007 05:18

Bode Eluyera  In Purgatory

# 4 First, you need to be commended for your efforts and time in writing on this very important topic. At the same time, I must say that I am not completely satisfied with the article for some reasons that will be stated here. Since you have taken it upon yourself to write on such a very important, complex and academic topic, I expected you to live no stones unturned in your analysis. I was expecting to read something new or a good analysis from your article. The pros and cons of a strong and weak naira, I assume, are well known to anybody with basic knowledge in economics. Therefore, as we say in Russia, "Ты мне Америку не открыл." The direct meaning of this statement is: "You have not helped me to discover America." That is, I already know the history of America or how it was discovered. But the literary meaning of this Russian expression is:" You haven't said anything that new, or that I don't know already. You failed to cover or address some key or vital issues in your article, which I expected from somebody who claims to be an authority or expert on this issue. Overall, you gave me the impression of somebody who just got hold of some already published articles or books on monetary policy and copied the contents. Imagine that you are the Governor of the Central bank or Finance Minister, and are invited by the president of Nigeria, Yaradua for consultation about the exchange rate of the naira to the dollar, and you tell him just what you have written here, I am afraid to say that by the end of of your presentation, the president will not only be more confused but your presentation will be of little value to him. Your article reminds me of the discussion I had with enforcer, not quiet long ago, on my article titled: "Abuja: Capital of Nigeria or Northern Nigeria? Economic analysis of the white elephant project (part 3). The article is available on this web site. We discussed about the "two-handed economist." I am afraid to say that you have acted exactly like the two handed economist who speaks with 2 mouths and avoids taking or defending a concrete position in order not to risk his career or reputation. So, if I were to write this article or be invited by Yaradua for consultation on the exchage rate of the naira , in addition to what you have written, I will or say the following: 1.Mention the main or key factor that influences the exchange rate of the naira vis-a-vis the dollar. You mentioned some factors in your article but left out the key factor. The key factor is the fact that Nigeria receives payment for its crude oil, which consists of at least 90% of its revenues, in dollars. In addition, I will tell Yaradua or my readers how a change in policy i.e. asking the buyers of our crude oil to pay us partly or completely in naira. 2. I will tell Yaradua or my readers, backed with sound arguments, what percentage of our oil revenues should be in naira. 3. I will tell Yaradua or my readers which exchange rate is optimal or the best for Nigeria in the short and long run. It's not enough to just tell your readers or Mr. President that the naira exchanged for about 136/137 to the dollar in 2005 and that the rate appreciated to #124.75 in June 2007 and that it is currently hovering around 120 (or thereabout) now. This is just "raw" data or information that anybody, including the President and your readers, that reads the newspapers or engages in foreign exchange transactions know. As an expert, I expected you to convert this data into "useful information" by stating CLEARLY whether the present rate is better or worse compared to 136/137 in 2005. 4. I will tell Yaradua or my readers why I think that my proposed optimal exchange rate for the naira to the dollar are the best for the country in the short and long runs. 5. I will tell Yaradua or my readers what strategy: financial, political, commercial, judicial, e.t.c. the country can use in achieving the optimal or desired exchange rate for the naira in the short and long run. 6. I will tell Yaradua or my readers what financial, political, commercial, legal policies to adopt in order to protect the naira against fluctuation of the dollar, euro and global financial crises in general. 7. I will tell Yaradua or my readers whether it is good for Nigeria's economy to allow the exchange rate of the naira to be directly to the dollar, euro or allow the exchange rate of the naira to float or be completely independent of the dollar. 8. Incase I support an independent exchange rate for the naira, I will tell Yaradua or my readers what financial, political, commercial, legal mechanizms can be used by Nigeria to achieve this. 9. I will tell Yaradua or my readers about how vulnerable our economy as a whole is due to the fact that about 95% of our oil and gas industries are controlled by foreign companies. I will tell the President that it's high time Nigeria sets up its own indigenous oil exploration and drilling companies. I will convince the President that Nigeria has the manpower to carry out this feat. I will tell the president that if Venezuela, Iran and other oil producing countries could do it, there is nothing stopping Nigeria from doing it. I will encourage the President to accept the challenge by arguing that we will be able to save billions of dollars every year if we can organize an indigenous oil exploration and drilling company. 10. I will tell Yaradua and my readers how vulnerable our economy is due to the fact that most of the personnel in the oil and gas sectors are foreigners. I will tell the president and my readers that this not only deprive thousands of Nigerians jobs but impoverishes us as a nation. I will tell the president the need for Nigeria to have its own manpower. I will convince Yaradua to force the multinationals to employ only Nigerians and train Nigerians in areas where they are found technically wanting. I will tell Yaradua that forcing the oil companies to employ only Nigerians means not only more jobs for Nigerians, but more buying power and more money circulating in the economy. 11. I will tell Yaradua and my readers how the multinational oil companies use different tax schemes including offshore taxation to deprive Nigeria of billions of dollars that could be additional revenues to fuel our economy. As a stop gap measure I will tell Yaradua to set up a panel consisting of Nigerian experts to review all oil and gas contracts with multinationals, including the financial, technical, ecological, supply, e.t.c. terms. I will convince Yaradua to renegotiate all our oil contracts. I will make him understand that there are precedents and that he should be afraid to negotiate good deals for Nigeria. I will tell Yaradua that initially the oil companies will protest the move fiercely and fight but if Yaradua holds on to his position, the oil companies will succumb simply because they have no choice. Moreover, half bread is better than none. Finally, you mentioned or quoted the deutsche mark in your article. I expected you to know that the mighty German deutsche mark has been phased out and replaced by the euro many years ago. I hope that my comment, made in good faith will be taken into consideration in your future presentations or articles. Wishing you all the best in your new book. Posted by Bode Eluyera| 25.12.2007 21:36