Nigerians are excessively focused on the exchange rate of the local currency, the Naira. It’s looked at as a barometer of the economy. Knowing and tracking the exchange rate is good, but perhaps we are missing the whole picture.
Want to reduce imports? Then you do not want a “strong” Naira. A strong Naira means less Naira is needed to exchange for dollars, e.g., $1: N200.
Want to increase exports? Then a Weak Naira is needed: A Weak Naira is more Naira required to exchange for dollars, e.g., $1: N1,200.
If the Naira is strong, Nigerian consumers can afford to import rice from the US; it’s affordable. A weak Naira makes rice imports from the US “expensive” because more Naira is needed. However, a weak Naira incentivises exports because cash crop farmers and NNPC can earn more FX by simply exporting.
Which policy is the Central Bank of Nigeria (CBN) pursuing? A Strong Naira policy. In April, the CBN pursued a tactic of selling FX to the Bureau De Charge (BDCs) at a progressively higher exchange value for the Naira, effectively making the Naira stronger. Keep in mind the FX exchange rate is within the CBN core mandate.
However, which policy is the Nigerian Federation seeking? A Weak Naira driven by exports? Nigeria survives on net exports of crude oil and gas. A dream world for Nigeria is one in which the national oil company, the NNPC Ltd, can export more oil at higher per-barrel prices. Thus, there is a policy conflict
The problem is not the exchange rate; the problem is a costly environment to do business in Nigeria
The way it’s supposed to work is this
- The Central Bank of Nigeria ensures $ supply but keeps Naira slightly weak to boost export competitiveness.
- A weak Naira makes imports expensive.
- Local SMEs then step in and manufacture substitutes for foreign imported goods at a cheaper cost. This is called Import Substitution.
- Over time, Nigeria produces those local goods it has a comparative advantage in, e.g., food and imports those it has no comparative advantage in, e.g., Boeing planes
- A nation gets rich by Net Exports. A currency must facilitate net exports, thus weak enough to be competitive but not too weak to make imports of inputs unbearable.
- Nigeria can’t do import substitution because it’s too expensive to manufacture in Nigeria. This means a weak Naira advantage can’t be achieved in Nigeria until local manufacturing costs drop. (Cost like power)
- So does Nigeria then seek a strong Naira? Nigeria does not have the FX reserves to maintain a strong Naira. To keep the Naira strong, the CBN has to peg it (even a silent peg) and support the peg with constant FX sales. The CBN needs robust Net exports to boost its reserves
So, what then?
Refocus away from exchangeratenomics into a massive investment in infrastructure to lower the cost of doing business locally in Nigeria
Power supply is the number one cost for Nigerian businesses, especially SMEs. The power supply in Nigeria is unreliable, and most manufacturers have to generate their own power, which is considerably more expensive. Local costs like power must fall for local manufacturing to kick in and replace imports via import substitution. As Nigeria gets import substitution right, the Naira gains as imports fall.
This means the real driver of the economy remains the fiscal or the executive, NOT the CBN and Exchange rates. Nigerians must move away from the myopic excessive focus on exchange rates and focus squarely on growth. Growth, driven by investment in infrastructure
The Federation must reduce the cost of doing business.
That’s the singular goal.
