• Friday, May 24, 2024
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Debunking Economic Myths: Strong currency doesn’t necessarily translate to a strong economy

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By Oluwatobi Ojabello and Wasiu Alli

Abiodun Oyekan, a capital market analyst, aptly compared evaluating a nation’s economic health to looking beyond someone’s appearance to understand their true character.

He emphasised that just as a person’s outward appearance can be deceiving, relying solely on a nation’s currency strength may not provide an accurate reflection of its economic well-being. Oyekan highlighted the importance of considering factors like GDP, export competitiveness, and economic diversity to gain a comprehensive understanding of a country’s prosperity and stability.

Q: “A stronger currency makes a nation’s exports more expensive for foreign buyers, leading to a decline in export volumes and revenue. This can harm key industries, undermine competitiveness in global markets, and hinder economic growth.”

Over time, the strength of a nation’s currency is often perceived as a barometer of its economic prowess. A robust currency is commonly equated with prosperity and stability, while a weaker one is viewed as a sign of economic fragility.

A nation’s currency is often considered strong when its value appreciates relative to other currencies, specifically the US dollar, in the foreign exchange market. This appreciation can be driven by various factors, including high interest rates, robust economic growth, and stable political conditions.

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However, the perception of a strong currency as an unequivocal positive overlooks the potential downsides and complexities associated with currency appreciation. One of the primary drawbacks is the adverse impact on export competitiveness.

A stronger currency makes a nation’s exports more expensive for foreign buyers, leading to a decline in export volumes and revenue. This can harm key industries, undermine competitiveness in global markets, and hinder economic growth.

While it’s tempting to gauge a country’s economic prowess solely by its currency value, such an approach can be deceptive. Economists highlight a crucial point: the apparent strength of a currency doesn’t always reflect its underlying economic health. One key reason is the impact of external market forces, including fluctuations in commodity prices and shifts in global trade patterns.

Read also: Debunking Economic Myths: Economic growth doesn’t always reduce poverty rates

In some cases, a country may experience a surge in its currency value due to factors beyond its control, such as rising demand for its exports or changes in investor sentiment.

Furthermore, the relationship between currency strength and economic growth is complex and multifaceted. While a strong currency can enhance purchasing power for imports and reduce inflationary pressures, it can also hinder export competitiveness and weigh on domestic industries reliant on overseas sales.

For instance, according to Forbes’ data sighted by BusinessDay, the Kuwaiti dinar is rated as the strongest currency in the world, with an exchange rate of 1 Kuwaiti dinar per 3.25 US dollars.

Meanwhile, while Kuwait’s gross domestic product (GDP) stood at a staggering $175.3 billion as of 2022, according to World Bank data, the United States of America’s GDP is 144 times bigger at $25.4 trillion.

Kuwait’s exports-to-GDP ratio shows a surge of 53.3% when compared to the US’s 11.8 percent, according to World Bank data. The USA’s GDP per capita, a measure of how wealthy a nation is, stood at $76 thousand, while Kuwait’s stood at $41 thousand.

China has a relatively weak currency when compared with the US dollar, as 1 Chinese Yuan exchanges for $7.2 using the Forbes currency calculator. However, China is the world’s second-largest economy after the USA, which boasts about $17 trillion in GDP.

What has made India the second-most populous nation after India with such a trillion-dollar economy is its export ratio, which stood at 20.7 percent.

Diving into Economic Landscapes: The USA leads with a robust $76,329, showcasing its economic prowess. Kuwait follows with $41,079, reflecting its oil-driven wealth. Egypt’s $4,259 highlights its challenges amidst political transitions.

Meanwhile, Tunisia and Ghana stand at $3,747 and $2,203, respectively, painting contrasting pictures of North African stability and West African growth. Nigeria lags slightly at $2,162, signalling room for advancement. Despite variations, these figures offer insights into each nation’s economic trajectory.”

Meanwhile, back in Africa, Nigeria is arguably the largest economy, though the International Monetary Fund said it has slipped to fourth this year. Nonetheless, it is a force to be reckoned with in the region, being one of the largest oil producers on the continent.

Nigeria boasts $472.6 billion as its GDP, according to World Bank data for 2022, even as the country is ramping up efforts to hit a trillion-dollar economy by 2026.

Inasmuch as the over 200 million-populated nation is poised to be a leading economy in Africa, its currency, the Naira, is not among the top 10 rated as the strongest currency in the continent.

The Naira, which was devalued in mid-June last year and allowed to be traded freely in the willing-buyer, willing-seller price discovery system of the country’s central bank, has been confronted with fluctuations.

This has led to the Naira plummeting against the dollar, hitting almost N2000/$ before a major rebound was seen, which has therefore made the currency the best performing in the world in April, according to Bloomberg and economists at Goldman Sachs.

Surprisingly, the top five African countries with the strongest currencies, as previously highlighted by BusinessDay, do not align with the top five largest economies on the continent—an intriguing revelation. These nations boasting the strongest currencies include the Tunisian Dinar valued at $1 to 3.11, the Libyan Dinar at $1 to 4.81, the Ghanaian Cedi at $1 to 12.08, the Moroccan Dirham at $1 to 9.93, and the Botswana Pula at $1 to 13.65.

In addition, South Africa leads the list with a nominal GDP valued at $373.23 billion, according to a recent report by the International Monetary Fund (IMF) in 2024. Egypt follows suit with a nominal GDP valued at $347.59 billion, while Algeria holds the third position with a nominal GDP valued at $266.78 billion. Nigeria, Africa’s largest economy, slipped to the fourth position with a nominal GDP valued at $252.74 billion, and Ethiopia holds the fifth position with a nominal GDP valued at $155.08 billion.

However, the Tunisian dinar is rated as the strongest currency in Africa, even though the Northern African nation’s gross domestic product is smaller than that of Nigeria.

Even as the Ghanaian cedi, the local currency spent in Ghana, comes in third as the strongest currency in Africa, its GDP-per-capita ratio of $2,318.31 is smaller when compared to Egypt’s at $3727.66, according to data by Statista.

Egypt stands as one of the top five leading economies in Africa, having $476.7 billion as the sum total of its national income, an amount higher than that of Ghana, which stood at $72.8 billion, according to Statista.

Like the Naira, the Egyptian pound was devalued, which saw the country’s headline inflation reach a record of 33.3 percent in March, just as Nigeria’s came in at 33.2 percent, data from the National Bureau of Statistics show.

Despite two consecutive devaluations of Nigerian currency, data from Statista shows that the sum of the top 3 African countries strongest currency GDP is not up to that of Nigeria. Tunisia’s GDP stood at $54.7 billion, Libya’s at $48.22 billion, and Ghana’s at $76.28 billion.

The dynamic realm of African economics revealed that Egypt emerged as a formidable force with a commanding $348 billion GDP, despite the devaluation of its currency and an increase in inflation rates, similar to Nigeria. The data highlights Egypt’s regional dominance.

Tunisia’s solid economic foundation shines through with a $51 billion GDP, while Ghana’s robust $76 billion GDP underscores its upward growth trend. Despite hurdles, Nigeria maintains its stronghold as Africa’s largest economy with a substantial $253 billion GDP.

However, recent data indicates Nigeria has slipped from this position to fourth, and factors responsible for this can be traced to the ongoing economic reform in the country. These figures illuminate Africa’s diverse economic landscape, which is ripe with potential and resilience.

Umar Farooq, an economist, emphasises the need for a holistic approach to economic analysis. He asserts, “While currency strength is undoubtedly an important metric, it is just one piece of the puzzle.”

Farooq underscores the significance of considering broader economic indicators, stating, “A nation’s economic health cannot be accurately assessed by currency strength alone. Factors such as GDP growth, trade balances, and investment climate play pivotal roles in determining long-term economic stability and prosperity.”

This perspective highlights the multifaceted nature of economic evaluation and encourages a comprehensive understanding of a country’s economic landscape.

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).

Wasiu Alli is a business and finance journalist at BusinessDay who writes about the economy, business trends, and politics. He holds a BA. Ed. and M. Ed. in English Language and Education.