• Friday, April 12, 2024
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Weak currency doesn’t always translate to weak economy

Weak currency doesn’t always translate to weak economy

Nigeria’s currency, the Naira, has over time faced significant fluctuations in its value compared to major international currencies like the US Dollar, Euro, and Pound Sterling.

This instability has coincided with economic uncertainty, leading to concerns about inflation, import costs, and the country’s ability to attract foreign investment.

While a weaker currency can improve export competitiveness, it also brings challenges for importing essential goods and services, potentially impacting domestic consumption and inflation rates.

Read also: Rare rates convergence, higher FX reserves give hope for a stronger Naira

Last year, 23 African currencies hit record lows against the dollar. The naira, which is moving towards being fully floated, has been devalued twice in attempts to close the gap with a parallel market rate. That makes it the third-worst-performing currency in the world, after the Lebanese pound and the Argentine peso, as reported by Bloomberg.

While financial analysts have predicted that the naira may plunge further in 2024, the naira’s performance in 2023 has been described as its worst year in the past 24 years.

The inflationary pressure resulting from these exchange rate fluctuations puts strain on household budgets and diminishes purchasing power, especially concerning essential commodities.

Moreover, the ripple effects extend to multinational businesses, with major firms like Cadbury, Nigeria Breweries, Nestle, and Neimeth collectively recording losses of about N200 billion, as earlier reported by BusinessDay. This underscores the challenges faced by both consumers and producers in navigating the volatile currency environment.

At a recent event themed “An Economy in Distress: The Way Forward” in Abuja, Nigeria, Mohammed Idris, the Minister of Information and National Orientation, representing the President, acknowledged the challenging times but emphasised attracting $30 billion in foreign direct investment (FDI) commitments since May 2023. However, while some multinational companies are leaving, such as GlaxoSmithKline, P&G, and others like Shell, they continue to operate strategically.

This occurrence can be conceptualised within the framework of what economists called the ‘investment paradox. The investment paradox in Nigeria occurs when some multinational companies are withdrawing or operating minimally due to economic crises, while significant foreign direct investment (FDI) continues to flow into the country.

The economic implications of Nigeria’s investment paradox are far-reaching, casting a shadow over the nation’s economic landscape. As multinational companies scale back or minimise operations due to ongoing economic crises, the repercussions are palpable.

The latest figures from the National Bureau of Statistics (NBS) paint a concerning picture, with the unemployment rate witnessing consecutive quarterly increases. From 4.1 percent in Q1 to 4.2 percent in Q2, and a worrisome 5 percent in Q3, job losses loom large on the horizon, exacerbating socio-economic pressures across the nation.

Moreover, the ripple effects extend beyond the labour market, with reduced economic activity echoing through various sectors. Annual GDP growth figures for 2023, coming in at a mere 2.74 percent, underscore the challenges ahead. This falls short of both previous growth rates and the projected value of 2.9 percent by esteemed institutions such as the International Monetary Fund (IMF) and the World Bank (WB).

Coupled with decreased investor confidence in the sectors affected by multinational company withdrawals, this downturn threatens to stifle overall economic growth and development, presenting a formidable hurdle in Nigeria’s quest for prosperity.

Read also: Naira pressure eases as external reserves sustain growth

Despite these challenges, there is hope. The influx of substantial FDI offers a glimmer of hope amidst the economic turmoil. Such investment injections have the potential to stimulate economic activity, create employment opportunities, and contribute to infrastructure development.

However, while FDI may provide short-term relief, ensuring its long-term sustainability and positive impact necessitates addressing underlying structural weaknesses and fostering a conducive business environment. Balancing these contrasting dynamics is crucial for Nigeria’s economic resilience and sustainable growth trajectory.

Nevertheless, it’s vital to recognise that a weakened currency doesn’t necessarily signify a feeble economy, despite arguments suggesting the contrary. Certain countries, including China, Japan, and Singapore, deliberately adjust their currency values to invigorate export growth and bolster competitiveness.

Yinka, an economic analyst, offers a unique insight into the perception of currency strength, asserting that a weak currency shouldn’t always be viewed in a negative light. According to him, the key lies in maintaining stability in the value of our currency, which he deems as a positive indicator.

Echoing this sentiment, Basit Shuaib, an economist, aligns with Yinka’s viewpoint, stressing the paramount importance of economic stability over the perceived strength of the currency. Both experts emphasise that a stable economy is crucial for fostering prosperity and ensuring the well-being of all citizens, regardless of whether the currency is deemed strong or weak.

Their perspectives underscore the significance of stability as a cornerstone for sustainable growth and development within the nation.

Adapted: Currency transfer

China, for instance, implemented a strategic currency devaluation policy in both 2015 and 2019. This move, amidst evolving global economic landscapes and trade dynamics, aims to fortify China’s position as a leading player in international trade. By devaluing the Yuan, China seeks to make its goods more attractive in foreign markets, thus potentially boosting export demand and driving economic growth.

The implications of China’s currency devaluation extend beyond its borders, potentially influencing exchange rates and trade balances among major economies. Analysts closely monitor these developments, assessing their potential impacts on global markets.

Despite past criticisms of the undervaluation of the Chinese yuan, recent data from the IMF underscores China’s ascension to become the world’s second-largest economy. This growth is propelled by the country’s robust manufacturing sector, export-oriented industries, and substantial investments in infrastructure and technology.

Read also: Tinubu’s wild bet on the Naira

Following China’s lead, countries like Japan and Singapore have also adopted similar measures in the past, showcasing their resilience and adaptability in confronting economic challenges. Despite initial apprehensions, these nations have maintained steady economic growth and stable trade relations, underscoring their ability to navigate complex economic landscapes.

Despite widespread perceptions of Japan’s currency, the yen, as comparatively weaker against currencies like the US dollar and the euro, Japan stands as a global economic powerhouse. Data from the World Bank and the International Monetary Fund (IMF) confirm Japan’s economic impact on the world stage.

In the latest report by the Association of World Business Institutions (AWBI) in 2024, Japan’s economic strength shines through as it consistently ranks within the top five in terms of GDP, reaching $4,291 billion. This robust performance is fueled by a vibrant manufacturing sector, especially in automobiles and electronics.

Japan’s automotive industry, revered for its high-quality vehicles, enjoys global acclaim and demand. Meanwhile, the electronics sector continues to lead in innovation and technological advancement, supplying cutting-edge electronic devices and components worldwide. These industries serve as the linchpins of Japan’s economic stability and prosperity, underscoring its status as a key player in the global economy.

Singapore typically does not engage in deliberate devaluation of its currency, the Singapore Dollar (SGD). Instead, the Monetary Authority of Singapore (MAS) adopts a managed float exchange rate regime, where the SGD is allowed to fluctuate within an undisclosed policy band against a basket of currencies.

The MAS uses monetary policy tools such as interest rate adjustments to ensure price stability and support sustainable economic growth, rather than resorting to currency devaluation as a means to stimulate exports.

Singapore’s economic strategy focuses on maintaining a stable and competitive exchange rate to foster investor confidence, attract foreign investment, and support its export-oriented economy.

However, like all currencies, the SGD can fluctuate in value due to various factors, such as changes in global economic conditions, monetary policy adjustments by major trading partners, and market sentiment.

Nigeria’s exports as a percentage of GDP, at 15.44 percent, highlight a key aspect of its economic structure, suggesting a need for diversification. While exports are essential, this relatively lower percentage underscores the importance of developing other sectors for sustainable growth.

Nigeria must balance its reliance on exports with strategic policies to strengthen this sector and enhance competitiveness. By expanding market access and fostering resilience, Nigeria can unlock greater economic opportunities.

Comparatively, China’s export contribution is 18.9 percent, showcasing its strong export-driven economy, while Japan and Singapore exhibit higher dependencies at 21.57 percent and 187 percent, respectively. These variations underscore the diverse economic landscapes of each nation, with export performance shaping overall stability and growth trajectories.

Read also: Naira strengthens by 0.90% as dollar supply increase

Amidst Nigeria’s economic landscape marked by currency volatility, the naira’s fluctuations against major international currencies raise concerns about inflation and import costs. While a weaker currency can bolster export competitiveness, it also poses challenges for domestic consumption. Nigeria’s export contribution, at 15.44 percent of GDP, underscores the imperative for economic diversification. Strategic policies are needed to strengthen exports while nurturing other sectors for sustainable growth.

In contrast, China, Japan, and Singapore exhibit varying export dependencies, highlighting diverse economic priorities. The Professional Update forum stresses the importance of stability over currency strength, urging targeted interventions to navigate Nigeria’s economic challenges effectively.

Recent unemployment figures present a contrasting view across selected nations like Nigeria, China, Japan, and Singapore. Nigeria experienced a consecutive rise in 2023, reaching 5 percent in Q3, signalling economic hurdles.

Conversely, China’s rate dropped to 5.2 percent from 5.6 percent in 2022, indicating positive strides towards job creation and economic growth. Despite their similar rates, China’s status as the world’s second-largest economy underscores its robustness.

Japan boasts a lower rate at 2.5 percent, reflecting its stable economy, while Singapore leads with a mere 2.4 percent, highlighting its strong job market. These disparities underscore distinct economic conditions and policy approaches among the nations. While Nigeria grapples with policy inconsistencies hindering economic progress, China’s strategic measures drive its economy forward, affirming its global economic prowess.

In contrast, Japan’s emphasis on manufacturing and technology fuels job opportunities, contributing to its economic stability. Singapore’s focus on stability fosters investor confidence, bolstering its job market and overall economic resilience.