I follow a lot of interesting conversations on twitter and often find that 160 characters is not enough to get my points across. I recently followed a conversation about the naira. The general consensus seems to be that a “strong” naira is a good thing but is it really?
In thinking about this question it is useful to start from a very simple economy. We can assume that there is no “rest of the world” and Nigeria is the only country. We can also simplify further by assuming that in our hypothetical Nigeria we produce only three things, bread, beans and oil. In this simple economy the value of the naira is meaningless. If bread costs N10 and beans costs N20 then what it really means is that we are exchanging two portions of bread for one portion of beans. It doesn’t matter if you equate that to N10 or N100 or N10000, it is still just two portions of bread to one portion of beans. The key point here is that what really matters is how much beans or bread or oil each person produces and consequently has to exchange for beans or bread or oil.
Now let us include another economy called the “rest of the world”(ROW) who trades internally in dollars and wants to trade with us. They cannot buy our stuff in dollars and we cannot buy their stuff in naira so we need to figure out a way to exchange dollars for naira. What determines the exchange rate is how much of our stuff they want to buy and how much of their stuff we want to buy. The key feature is that buying stuff from the rest of the world means that you produce less of those goods locally and on the flip side selling stuff to the rest of the world also implies that you produce more of those goods locally. The relative balance between how much you export and how much you import matters a lot for local production.
Back to our discussion of strong vs weak naira, a strong naira implies that we can buy a lot more goods from the ROW which implies that we should import more relative to exports. This in turn implies that we should produce less locally. In reality you shouldn’t be able to sustain a strong currency and low productivity . Unless you find money in the ground. Which is really what crude oil is. Finding money in the ground. Unfortunately the gains from the oil industry benefit only a small fraction of the population. Having a strong naira means that small fraction would be better off but the rest will be less productive and worse off.
So should we really want a strong naira? NO we should not. We shouldn’t really want a weak naira either but that is a story for another day.