• Thursday, May 23, 2024
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BusinessDay

The double-edged sword of a stronger Naira

Naira exchanges flat after CBN raises interest rate

News about Nigeria’s monetary policy management has been upbeat for a while. The media gladly proclaims things like “Naira gains further against the dollar.” As we wrote on Tuesday, April 16, 2024, the dollar’s value averages N1000-1$ and is headed lower.

It is such a welcome relief from the N1700-$ all in the first quarter of this year. That stratospheric fall in the value of the Naira caused consternation and panic in the economy, which had consequences on the prices of goods.

Read also: Naira appreciates by 12.5 percent at official market

We join in the ululation about the improvement. Congratulations to the Central Bank Governor, Mr Yemi Cardoso, and his team. The market and the streets have given Cardoso a new name of endearment: Cardi B. Go on with the reforms, Mr Governor.

There are many sides to the issue of a stronger naira, and they deserve interrogation and analysis. One is concern about the continued decline in our foreign reserves alongside the strengthening of the naira. Bloomberg, in a report this week, suggested that “Nigeria is burning through foreign-exchange reserves at a rate not seen in four years, raising concerns that the central bank is depleting its dollar holdings to support the naira after pledging it would allow the currency to float more freely.”

Others argue that the naira’s strengthening is not due to any concerted Central Bank defence but to the reform measures it instituted. These include reforming the currency market, paying off accumulated debts of $2.5b to foreign investors and suppliers, and ensuring a dollar supply of $64b to BDCs.

There are many benefits and costs to the emergence of a stronger naira.

“The Federal Government should promote non-oil exports by offering feasible incentives and policies.”

The foremost benefit is a reduction in import costs. A stronger Naira means cheaper imported goods, which benefits consumers by increasing their purchasing power and reducing inflation on imported items.

A stronger Naira would encourage domestic production. However, many factors, such as the new ultra-high electricity tariff, work against it. A stronger naira could make locally produced goods more competitive and stimulate local businesses and job creation.

An upside is increased foreign investment. A stable and robust naira should attract foreign investors who see less risk in currency fluctuations. Capital and expertise to boost the Nigerian economy should be reasons to come into the country to invest.

A stronger naira reduces the amount of local currency needed to repay our foreign debts and thus eases the financial burden. Debt servicing is a critical concern for Nigeria as it continues to chip into our annual budgets. It is a sword of economic perdition hanging over the country.

Read also: Why Nigeria inflation still on the rise despite naira rebound

There will be job losses in the export sector. Agriculture, oil, and gas are some of Nigeria’s primary exports. Oil and gas are critical, and we do not want to lose jobs in this sector.

Another risk is lower remittances from abroad. Nigerians working abroad could reduce their remittances if the strength of the naira makes it less appealing to send money home and exchange it. A reduction in remittances could affect families at home who rely on them.

A stronger Naira could affect inbound tourism. It would make Nigeria a more expensive travel destination for foreigners, potentially hurting the tourism industry.

The federal government needs a balancing act to manage the situation. Nigeria should pursue a stable exchange rate that balances the benefits and drawbacks. The Central Bank of Nigeria should continue to use interest rates and foreign exchange interventions to influence the exchange rate.

Our over-reliance on oil exports should cease. The Federal Government should promote non-oil exports by offering feasible incentives and policies. Export revenues will certainly lessen our vulnerability to fluctuations.

Citizens should continue to be actively interested in developments in our forex market and be informed about economic trends and how they impact the exchange rate. Nigerians must support local businesses by buying Made in Nigeria as a hedge against weakening the naira in the future, and more businesses should explore the export market.