While the Naira doesn’t buy much in Nigeria nowadays, our columnist writes, the currency’s regaining strength internationally has been on display—in ways that aren’t entirely beneficial.
Step into any grocery store or food market, and the stark truth becomes painfully evident: the once-mighty Naira now wields little purchasing power, unable to secure even a humble quantity of garri. Why is this the case? The culprit lies in the insidious grip of inflation, a voracious beast that has ravaged the purchasing power of the currency.
According to recent data from the National Bureau of Statistics (NBS), in March 2024, the purchasing power of the naira plummeted, with a mere handful buying 40.01 percent less food than it could just a year ago. This isn’t just a blip on the radar—it’s a glaring indicator of the economic challenges facing everyday Nigerians.
Q: “While the results aren’t yet sufficient to restore the naira to its former glory, Nigerians are eagerly anticipating the blessing of a strong naira.”
Every Nigerian consumer is acutely aware that the naira doesn’t command the same respect it once did. However, thanks to the tireless efforts of the monetary authority, there’s a glimmer of hope on the horizon. While the results aren’t yet sufficient to restore the naira to its former glory, Nigerians are eagerly anticipating the blessing of a strong naira.
But what do we mean when we say the naira is strong?
Think about it like this: when we say something is strong, it sounds good, right? Nobody wants to be weak. So, when people talk about the naira being strong, it’s seen as a good thing.
It means the currency is powerful and stable. That’s why many believe the naira should always be strong—it’s a sign of economic strength and success.
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 the depreciation of the naira exchange rate, from stronger than 1:1 in the 1970s and early 1980s to the current market rate of about N1361: $1, as reported by FMDQ on April 26, 2024.
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—other things being equal.
How does the exchange rate of the Naira impact inflation?
Inflation happens when there’s too much money around but not enough things to spend it on. It’s like when everyone has money to buy bread, but there’s only a limited amount of bread available.
According to economists, one way to keep inflation under control is by making sure the value of the naira, Nigeria’s currency, is just right.
Let’s break it down with an example: imagine we have $1 billion that we want to exchange for Naira. If we exchange it at a rate of N500 to $1, we’d end up with a whopping N500 billion in Naira. That’s a lot of money! And when all that money gets into the banks, they can use it to lend out even more money, making the situation even worse.
But what if we exchanged that $1 billion at a stronger rate, like N250 to $1? In that case, we’d only end up with N250 billion in naira. That’s half the amount we had before! And when there is less money floating around, inflation tends to go down. It is like having fewer people chasing after the same loaf of bread—it is easier for everyone to get a slice.
So, why does it matter if inflation goes down? Lower inflation means that the money you have in your pocket can buy more stuff. Imagine if you could buy two loaves of bread for the same price you used to pay for one. That’s what lower inflation can do—it makes your money go further.
In successful countries, the Monetary Authority aims to keep inflation at a level equal to or less than the threshold set. But in Nigeria, our current inflation rate is a whopping 33.2 percent, as reported by the National Bureau of Statistics (NBS) in March 2024!
That means prices are going up by more than a third every year. And if you’re living on a fixed income, like many pensioners are, that can really hurt your ability to afford things.
Now, let’s talk about what a stronger naira can do to help. According to a report by an independent paper, having a stronger naira would mean that it would cost less for the government to borrow money.
That is because when the naira is strong, interest rates tend to be lower. So, whether it is the government or businesses borrowing money, they can do it more cheaply, which is good news for everyone.
Basit Shuaib, an economist, views the notion of a “strong naira” with a blend of pragmatism and optimism. While a robust currency symbolises stability and confidence in Nigeria’s economic prospects, achieving and sustaining this strength requires a multifaceted approach.
It involves implementing sound monetary policies, fostering a conducive business environment, and addressing structural challenges to enhance competitiveness. He added.
Favourably, having a strong naira can help to lower inflation, boost the purchasing power of ordinary people, and make it cheaper for the government to borrow money.
It is like having a magic wand that can make everyone’s lives a little bit easier. So, while the naira may not be as strong as we’d like it to be right now, there’s hope that things can improve in the future.
Regrettably, despite the advantages of a strong naira, it comes with its fair share of challenges that can impede export competitiveness and burden domestic industries that depend on overseas sales.
A recent report by BusinessDay delved into the complexities of this issue, highlighting the dual nature of a stronger naira. On one hand, it may lead to job losses in the export sector, which encompasses vital industries such as agriculture, oil, and gas. Given the significance of these sectors to Nigeria’s economy, preserving jobs within them is paramount.
Additionally, there is the concern of lower remittances from abroad. With a stronger naira, Nigerians working overseas may find it less appealing to send money back home and exchange it, potentially resulting in reduced financial support for families who rely on these remittances for their livelihoods.
I refrain from making predictions, except for these observations.
First, the current high naira exchange value will likely reverse itself once the Monetary Authority shifts its focus from inflation (but prioritises the inflation threshold) to economic fragility, a move that may involve adjustments in both monetary and fiscal policies, as has been observed in the past.
Second, the value of the naira is gradually decreasing both domestically and internationally, but predictions of its collapse are premature due to the absence of a viable alternative currency.
Third, Nigeria’s heavy reliance on oil exports exposes the Naira to volatility, with fluctuations in global oil prices impacting foreign exchange reserves and exchange rate stability.
We would all be much better off if we didn’t have to constantly concern ourselves with the naira—whether it’s struggling to buy what we need, dealing with its high exchange rate, or manipulating it for political or economic gain.
Oluwatobi Ojabello, senior economic analyst at BusinessDay, holds a BSc and an MSc in Economics as well as a PhD (in view) in Economics (Covenant, Ota).
