Naira Exchange Rates: Worth the Hype?

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.

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 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 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.