Should we really want a “strong” Naira?

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.


5 thoughts on “Should we really want a “strong” Naira?

  1. It’s the same for all ” developing nations”, Take fir ex, the Philippines…. when the peso is strong, exports go down because less goods can be bought with dollars , but when it is weak, exports go up… but domestically, the common people suffer because prices of common goods go up.

  2. Yeah It’s a tough job being a Central Bank chief in Nigeria. Policy is rendered useless in the face of reckless government spending. In fact I wrote about this a while ago during the whole IMF brouhaha about letting the currency fluctuate ( ). There’s not much the CBN can do if the FG doesn’t reorganise its fiscal policy, cutting spending and still finding out a way to improve key infrastructure. If the bottom line doesn’t change then letting the naira devalue won’t have the supposed increase in productivity but will just make the population poorer. The CBN has no choice but to hang on for as long as possible and hope for a turn around from the FG’s end. They can probably afford to do this now with oil prices still reasonably high but sooner or later if nothing changes they have to. I guess he has hope in the divine grand design. At least for now.

  3. There is no denying the ingenuity of your model for its intended illustration. My previous rejoinder was meant for the more sophisticated segment of your readership-no condescension intended-who might be left wondering about the obvious disconnect with real world economics. Again, you were very careful to avoid all the jargons and “wonkese” to make it plain and that was brilliant

    SLS has got the toughest central banking job in the whole world and the options available to him are hopelessly limited (even aside the usual odd choices reserve banks elsewhere have to make) which is why we shd all sympathise with him. First we have a shallow structurally disjointed monocultural economy overheating with a double digit rising inflation and a govt so adept at patronage and corruption that the whole concept of fiscal restraint is unknown. The CBN cannot do much about inflation bc much of it is imported (virtually everything we use in Nigeria now is imported!) and the traditional monetary policy measures like raising interest rates is not only inappropriate (considering potential effects on the real sector) but also ineffective against imported inflation.

    The other big driver of inflationary pressure in Nigeria is unbridled govt spending that is not tied to any form of productivity. It’s not just an issue of inefficiency or poor spending choices but one of outright recklessness. We have seen the decimation of the Excess Crude Account, depletion of our forex reserves,unprecedented growth of govt spending on totally worthless items like 50th anniversary and outright embezzlement. There is absolutely nothing to show for all these expenditure: our infrastructure are still moribund, capacity utilisation has tanked, social services are collapsing and there is absolutely no tangible benefit (realistically expected or felt) from these spendings. In effect, it’s entirely FISCAL NOISE and the resulting rise in volume of money in circulation without commensurate improvements in productivity inevitably causes continuous price rise. Again, there is absolutely nothing SLS can do about this-he has no control over the PDP govt or its happy-go-lucky squandermania.

    Coming back to our dear Naira and putting all the above and more into account, it is very obvious that the Naira is presently overvalued-not just in reality but also on the balance of probabilities in terms of short to medium trajectories of policy and market conditions. Speculators would bet against the Naira and further put pressure on it. In fact, the devaluation is not “impending”, it’s already well under way in the “black market”. For people who have stockpiles of cash and no intention to invest it in Nigeria, it makes all the sense in the world (in fact, it’s actually getting late) to keep those assets in forex (not the Euro!) in domiciliary accounts or foreign bank accounts. A sensible alternative is to buy high growth assets whose appreciation would outstrip the combined effects of inflation and devaluation. Those with not-so-liquid assets need to consider the potential for growth (which against all odds, remains high in Nigeria compared to alternatives) of the assets in its present form before making their move. Going forward, there is only one way for the Naira which is DOWNWARDS and the depreciation would most likely happen faster than ever before in our history except for the SAP era. The only way out is for the govt of the day to, by some divine grand design,turn a new leaf and put its house in order.

  4. @Ona I agree with you a stable naira is the best option..not strong vs weak. But just to clear up some points; The point of this was to make the model as simple as possible. Yes in the real world inflation and a lot of other things matter but in the context of exchange of goods and services in this simple closed model it doesn’t. Remember there are no workers or salary earners etc…just people producing bread or beans or oil and wanting to exchange that with each other. I’m trying to point out what role money really plays.

    Secondly I am not against importing. Importing is good as long as you export something. We are in a peculiar (or maybe not so peculiar) case where our main export, oil, gives us the capacity to import a whole lot more than we really should to the detriment of other sectors. So even though we have the capacity to support a stronger naira the non-oil sector suffers from that. In theory we should devalue the naira to strengthen the non-oil sector which is what the market seems to be pushing for. The problem is we know that because of our electricity, security and other missing infrastructure a devaluation won’t improve productivity in the non-oil sector. It will just make us poorer. The CBN might not have a choice in the long run but for now they have to give the current administration a fighting chance to fix some of those key problems.

    Yeah you are right, the question is not really about a weak or strong naira but a stable one hence my question on if we should even want a strong naira.

  5. I find this analysis interesting. It is however simplistic to a fault. Clearly in an attempt to describe the situation in ‘layman’ terms, the author ended up describing something substantially different from reality and defeated the purpose of an otherwise ingenious explanation.

    In real life economics, even if the rate of exchange between bread and beans is held constant at 2:1, it actually does make a huge difference whether bread is N10, N100 or N1000 (and beans correspondingly N20, N200 or N2000). It make so much difference in fact that there is a term for it -INFLATION-and much of macroeconomic policy revolves around ensuring that this does not happen. Indeed, even the reverse trend-DEFLATION-is even much more troublesome to deal with. We would leave the details of the chaotic effects inflation/deflation has for another day.

    The problem with a stronger Naira is not the improved purchasing power it endows. No! In fact, we should all be happy to be able to import and consume more of a wider variety of goods and services and that in itself, provided it is equitable, would mean better quality of life for our people. Again, being able to import more does not have to mean that we are producing less since the goods we import may be very different. We might begin to import more capital goods (i.e. goods used for further production such as factory machinery or infrastructure) if for e.g. by some freak event, Nigeria gets a govt tomorrow that wants to develop the country. This in turn would free the bottled up productive capacity due to our parlous infrastructure and we might see our exports rising in greater proportion than the rising imports.

    The snag with a stronger Naira is that it makes our exports less competitive. But our main export is crude oil whose price is determined by market forces far removed from the value of the Naira! Even then, for the sake of the other struggling export businesses in Nigeria, we would really not want a Naira that is “too strong”. How strong is “too strong” is a question for another day. The unfortunate thing is that in the long term, we cannot make the Naira “stronger” even if we wished unless the deep seated structural problems of the Nigerian economy are dealt with. Sanusi Lamido Sanusi (SLS) has been fighting a losing battle trying to do just that (ie prop up the Naira) and the cost has been staggering in terms of depletion of our foreign reserves. Some of us are convinced that given the profligacy of the present govt, its inefficiency and gross lack of transparency, and the outlook in the global oil markets as growths stutters worldwide, the Naira is currently overvalued and in for a long period of downward pressure. We believe SLS shd have a rethink and allow the Naira more flexibility. Now, I understand the dire consequences these could have on local inflation but unfortunately, as long as we have the kind of govt we now have, we cannot realistically expect a different outcome.

    A strong or a weak Naira? First, we need to understand that these terms are not absolute in their meaning. Usually when people say strong or weak in terms of value of a currency, they are usually actually implying appreciation or depreciation in value. Understanding the dynamic nature of these terms goes a long way to enable us form an informed opinion. And here, as in most other places, virtue is in the middle. We should be asking not for a “strong” or “weak” Naira but for a STABLE one. We do not want the kind of rapid fluctuations in value we have seen in the last decade. Such fluctuations generate uncertainty which is bad for business.

    Give us a STABLE NAIRA!

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