Why do you believe that a stronger naira is better for the economy?


Historical evidence clearly confirms that the trajectory of deepening poverty in Nigeria correlates loyally with depreciation of the naira exchange rate from stronger than 1:1 in the 70s and early 80s to current market rate of about N160:$1. In reality, a much stronger naira should yield more benefits to our economy, and halt deepening poverty; conversely, any naira depreciation will further fuel inflation, deepen poverty, and widen the already huge gap between the rich few and the poor masses.


So, how does naira exchange rate affect inflation?


Inflation is generally defined as excess money chasing too few goods; in other words, inflation will be restrained, when optimal naira values exist in the system. For example, the substitution of naira allocations for say, $1bn distributable revenue at a rate of N160:$1 will increase the actual naira stock in the banks by N160bn, while commercial banks could leverage almost 10-fold on this amount, to compound the burden of surplus naira in the economy. Conversely, additions to already bloated money supply from monthly naira allocations would be reduced by at least 50 per cent to just N80bn, if the same $1bn allocation was exchanged at a stronger rate of, say, N80:$1.


Consequently, inflation will fall with a stronger naira rate, as there would be less surplus naira chasing available goods and services; lower inflation rates will increase the purchasing power of all income earners, while also reducing production cost. Indeed, economic best practice inflation rate is often less than two per cent in successful economies. In reality, our current inflation rate of eight per cent means that static income earners (e.g. pensioners) will lose 40 per cent of their incomes' purchasing power every five years.

Does a stronger naira positively affect interest rate?

In the earlier article "Should the Naira be Devalued", (please see www.lesleba.com) we explained that existing high interest rates are the result of CBN's self-infliction of surplus naira on the economy. We also explained that systemic naira surplus increases with lower naira exchange rates; thus, a stronger exchange rate of, say, N80:$1 will reduce the level of disenabling excess naira by at least 50 per cent.

In such event, CBN will not become compelled, for fear of inflation fueled by surplus naira, to sustain disruptively high Monetary Policy Rates (MPR) that trigger over 20 per cent cost of funds to the real sector. Thus, with reduced or optimal money supply, the apex bank will inevitably reduce its MPR (i.e. rate at which it lends to commercial banks), from the current disturbingly high level of 12 per cent, to benign levels that will encourage banks to, in turn, provide credit to the real sector at rates that support increasing productivity and more job opportunities.

Evidently, lower cost of borrowing will reduce interest rates, so that made-in-Nigeria goods would become more competitive against imports, which are supported with cheap concessionary funds. Thus, a stronger naira will not only stimulate productivity, but would also bring about much cheaper made-in-Nigeria goods, and create additional jobs.

Nonetheless, we must recognise that no country successfully grows its economy when government deposits with banks earn zero per cent, while government simultaneously pays double-digit interest rates to the same banks, just to remove perceived surplus naira from the system.

Will a naira exchange rate of N80:$1 have any positive impact on wages?

An exchange rate of N80:$1 will certainly enhance the naira's purchasing power. Thus, the N18,000 minimum wage, for example, which is currently equal to about $110, would now be worth $220 per month; therefore, the additional product demand created by the higher purchasing power of income earners would encourage local entrepreneurs to produce, if cost of funds also fall below 10 per cent.


What impact would such entrepreneurial impetus have on our economy?

Well, the renewed spirit of enterprise would ultimately lead to the creation of more job opportunities, as new investors enter the market, while established industrialists expand their capacity utilization, or retool their plants for increased production. Ultimately, the wages earned by the increasing army of newly employed workers, will also create additional consumer demand that will further invigorate the industrial climate, and instigate rapid industrial expansion, with even more job opportunities.

Will a stronger naira eliminate fuel subsidy?

Yes, it would; for example, if 1litre of petrol sells for $1 ex refinery, this would be equivalent to N160/litre in Nigeria. If however, the naira rate falls from N160:$1 to, say, N200:$1, the same petrol ex-refinery would now also sell for N200/litre.

Furthermore, if however, petrol continues to sell for N97/litre instead of the actual market price of about N200/litre, the attendant subsidy value would increase to N103/litre, instead of the current N53/litre with exchange rate of N160:$1.

Nonetheless, a stronger naira of N80:$1 will reduce petrol price to N80/litre, and save the nation over $12bn annually from the elimination of fuel subsidy. Indeed, a petrol tax of N17/litre can be levied by government

Thus, the sum of over $12 billion (N2tn) which is currently frittered away as fuel subsidy annually, will become available for rapid infrastructural enhancement in the areas of education, health, transportation, etc.

Evidently, it will cost this and future generations an arm and a leg, if we had to borrow $12 billion annually at cutthroat interest rates to enhance our infrastructure.


Will a stronger naira reduce our national debt burden?

As earlier explained above, a stronger naira will reduce the cost and size of government borrowing, as cost of funds will fall for both private and public sector borrowings. Additionally, government need not increase its debt burden, by providing funds to the banks at zero per cent, and irrationally borrowing back the same funds at double-digit interest rates in order to manage surplus naira and contain inflation.

In conclusion, however, the distortions associated with excess naira will be harmoniously resolved if dollar certificates are adopted for the allocation of dollar-derived revenue.

eunisam: what about the disadvantages.

CFCfan:
Exports from Nigeria would become relatively more expensive.
Using the current rate of N160:$1, a box of bananas used to cost N100 ($0.62). After an appreciation in the value of the Naira to N80:$1, the cost for the foreign importer will now be $1.25.

daveP: definitely as in our advantage. This is worth happening. Especially it would revive the groudnut pyramids that are now abadoned.

CFCfan:
True. Also, a strengthened Naira will decrease the cost of living

CFCfan:
True. Also, a strengthened Naira will decrease the cost of living

donguutti:
nwanne, as an Unofficial disciple and Follower of lesleba, I agree with most of his articles regarding currency
management especially as it concerns CBN's current method .I however would disagree with his naira strenghtening
proposal.A stronger naira does all he said quite alright, but it would wreak havoc on our Governments as their revenue
would be halved @80 naira/$.

On the issue of Exporters , it would destroy,them.Lets take your box of banana sample.Would a foreign importer
pay double the price for a good he can obtain somewhere else.E.g Our cocoa exports(plus other commodities) are priced in $.If a farmer sells
10 tonnnes at $2000,(International price), he would earn #3.2m, but if the naira becomes stronger, his earnings
would be #1.6m and remember his costs are naira dominated.

However,lesleba dollar certificate currency exchange mechanism , would do us a lot of good

daveP: so 1000 and 500 nairanotes get to disappear as well. Thats why i fear french-speaking countries in africa- haba 1million cfa as a note on its own?

donguutti:
nwanne, as an Unofficial disciple and Follower of lesleba, I agree with most of his articles regarding currency
management especially as it concerns CBN's current method .I however would disagree with his naira strenghtening
proposal.A stronger naira does all he said quite alright, but it would wreak havoc on our Governments as their revenue
would be halved @80 naira/$.

On the issue of Exporters , it would destroy,them.Lets take your box of banana sample.Would a foreign importer
pay double the price for a good he can obtain somewhere else.E.g Our cocoa exports(plus other commodities) are priced in $.If a farmer sells
10 tonnnes at $2000,(International price), he would earn #3.2m, but if the naira becomes stronger, his earnings
would be #1.6m and remember his costs are naira dominated.

However,lesleba dollar certificate currency exchange mechanism , would do us a lot of good

seunmsg:
Using your banana example and an exchange rate of N80:$1, the purchasing power in naira of N1.6million will be higher than what the same amount can purchase at an exchange rate of N160:$1.

CFCfan:
Yes, the Naira would be 'harder' to earn. For eg, if the rate is N50=$1, many folks will sweat to even earn N5000 because the Naira has been strengthened massively. But the cost of living would reduce drastically and the middle class will expand massively.

CFCfan:
lmao
Higher denominations do not necessarily lead to a high inflation rate (double digits). I think Nigeria can still have the N1000, and still appreciate in value vs the US Dollar. Anyway, I'd like to see the scrapping of the N1000 note, leaving N500 as the highest denomination; in order to save costs to the CBN and the mint.

daveP: il rather 200 be d highest. And coins.... Well its hard for acceptance among the public now. Its that import, export that will bear d ros and cons.