The naira has understandably been under pressure lately as oil prices dwindle threatening our revenue. Many think devaluing the naira is a bad thing considering the effect on the economy. But the AMCON boss in an excerpt of a paper he delivered yesterday at a CBO Capital event took a rather contrarian view about the concept of devaluation. Here is what he said…
I will give you a very general example. If you can buy a loaf of bread in the US for $1 and you can buy the same in Nigeria at N160, now that is the true exchange rate based on purchasing power parity. Now, if a year later, inflation in Nigeria is 10 per cent and that bread is now costing N176 but still costs $1 in the US, then any rational person in the US will buy the bread for $1 in the US and then sell it in Nigeria for N176, exchange the dollar at N160 and make N16 profit and if that continues for two or three years, all the bread makers in Nigeria will go out of business and we will resort to importing bread because the exchange rate is encouraging it.
”To offset that, all we need to do is to change the exchange rate to N176 by next year, so that the man who buys the bread in the US and sells in Nigeria and sells at N176 and changes it back to the dollar does not make any profit. That is the difference between managing the exchange rate in real terms versus managing it in nominal terms. So, we must change our perception that because the naira moved from N160 to N165, it weakened, it could actually have strengthened. So if we are interested in employment and maintaining our competitive advantage, we must manage exchange rates based not on nominal but in real terms.”
So, what do you think? Do you agree with his views? I’ve always believed whatever economic policy a country has should be based first and foremost on ensuring prices are cheaper for the common man. Free trade makes the world a lot more competitive. Devaluation thus help eliminate arbitrage but thr consequences on inflation cannot and investing cannot be ignored. As long as we depend on FDIs to grow our economy and we are import dependent it is important that we have a stable currency.