10 Ways To Increase the Value of Naira

In history, the Nigerian currency has never experienced a situation where one U.S. dollar is exchanged for N1,444 at the official market. In the parallel market, the exchange rate stands at $1/N1,451, at the time of updating this article.

The disparity between the dollar and the Naira has raised questions among Nigerians, such as why the Naira is losing its value and what the effects of a stronger US dollar against the Nigerian currency will be?

Since the Bola Tinubu-led floating of the Naira and the unification of the exchange rate came into effect, the Nigerian currency has not stabilized. Some supporters of the policy argue that the local currency is still finding its real value.

With the flotation and unification in place, what policies can the Nigerian government consider to increase the value of the Naira against other currencies?

In 1973, the Naira was stronger than the US Dollar. Today, the reverse is the case.

Can the Nigerian government bring back the glory of the Naira against other currencies? What measures can the government take to encourage investors to store their wealth in Naira without the risk of losing its value?

Below are some of the measures authorities can take to increase the value of the Nigerian currency:

Expanding exports

One potential strategy to enhance the strength of the Naira is to diversify and expand exports. Currently, Nigeria heavily relies on revenue generated from the sale of oil to sustain its foreign exchange (FX). What happened to the agricuture sector?

However, when the international market experiences a decline in crude oil prices, it directly impacts earnings for the country. In such instances, the government often resorts to borrowing to cover up for the reduction in income.

Some time ago, we all witnessed trouble for the Naira as it faced escalating challenges, primarily driven by the downward trend in the price of crude oil.

Crude oil currently accounts for more than 90% of Nigeria’s foreign exchange earnings, according to Natural Resource Governance Institute, highlighting a significant drawback of over-reliance on this single revenue source.

The vulnerability of the Naira becomes evident when global demand dictates the direction Nigeria takes.

Diversifying the export base by promoting and supporting other sectors of the economy could help mitigate the risks associated with overdependence on oil and contribute to a more stable and resilient foreign exchange situation.

Thankfully, Nigeria’s apex bank launched the ‘100 for Policy’ on October 25, 2021, with the core mandate of boosting local manufacturing. It’s a positive step in the right direction. The government’s success will depend on the consistency of its good monetary policies.

Ease pressure on the foreign exchange market

The government needs to ease the pressure on the foreign exchange market to meet the high demand for hard currency in the country—a suggestion also offered by the World Bank a few weeks ago.

World Bank country director, Shubham Chaudhuri, was quoted as saying “continued and even stronger action and a clear commitment from the central bank will go a long way toward facilitating a stronger recovery.”

Sell foreign exchange assets and buy their currency

The Central Bank of Nigeria (CBN), being the official monetary advisor to the Nigerian government, should encourage the Federal Government to follow in the footsteps of China and consider investing in US government bonds.

In 2023, China was holding over $1 trillion worth of US government bonds, it dropped to $868.9 billion U.S. dollars as of January 2, 2024, a strategy that could offer potential benefits.

Consider what would happen to the Chinese Yuan if China were to sell its Treasury bills and repatriate the proceeds.

This action would likely lead to a depreciation of the dollar against the Chinese Yuan, resulting in the appreciation of the Yuan.

The Chinese government has adopted this strategy over time: purchasing Treasury bills of other countries and bringing back the proceeds to China. Nigeria can do the same.

“Currently, China has a large current account surplus with the US. This flow of money into China would usually cause an appreciation.

“However, China has deliberately decided to use its foreign currency earnings to buy US assets. They do this to keep the Yuan weaker and therefore keep their exports more competitive.”

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Higher interest rates

Economists propose that higher interest rates can attract inflows of money, as banks and financial institutions may move capital to other countries to capitalize on better returns on savings.

The Nigerian Naira has the potential to regain its value if banks leverage this strategy, although it comes with downsides.

One of the drawbacks is that higher interest rates may dampen economic growth. The effects of elevated interest rates can be significant if not strategically implemented by a developing country.

For instance, during a recession, higher interest rates might not be suitable due to their potential side effects on economic growth.

Reduce the country’s gross demand for dollar

A long-term solution to restoring the value of the Naira involves reducing the country’s gross demand for the dollar.

The most efficient approach is to decrease the importation of goods for which we have a comparative cost advantage, such as crude oil.

Addressing issues with refineries becomes crucial, as fixing them would diminish the need for dollars spent on re-importing finished petroleum products.

What about the Nigerian lawmakers who imported exotic jeeps with hundreds of dollars when the country’s economy is on its kneels?

Currency Credible Assurance

Have you ever wondered why Switzerland is often referred to as a ‘safe haven’ currency? Why do corrupt Nigerian politicians move their loot to Swiss banks?

This phenomenon stems from the assurance provided by the Swiss government due to its stability, aiming for a higher exchange rate even in the face of turbulent times or recession.

When a government provides credible assurance for its currency, it can encourage speculators to move money into the country, as seen in the case of Nigeria.

However, it’s essential to approach this cautiously to avoid potential issues for exporters. Currently, how many investors are choosing to invest in Naira compared to Swiss Francs is a question that requires careful consideration.

Naira Demonetization

Demonetization is not unfamiliar in Nigeria. In 1984, the country underwent a demonetization process when the government changed the color of all currency notes in circulation.

This strategic move can be employed to curb money laundering and eliminate black money from the financial system.

Additionally, demonetization serves as a means of repairing the relationship between monetary aggregate and aggregate output, a measure of reasserting monetary control, and a step towards restabilizing financial stability.

Countries like Ghana and India have previously implemented similar measures.

However, it’s crucial to approach demonetization with caution, considering the potential influence of a manipulative political class and their agents.

Reduce inflation

Given the hyperinflation affecting the cost of goods in Nigeria, restoring the value of the Naira poses significant challenges.

Nigeria’s inflation rate is notably higher than that of its competitors, leading to a situation where some domestically produced goods are even more expensive than imported ones.

To make the Naira regain its value, the Federal Government needs to address inflation. Lowering inflation below that of competitors is crucial for making the country’s goods more attractive, consequently increasing demand.

Achieving this requires the implementation of tighter fiscal and monetary policies, as well as supply-side measures by Nigeria’s government and the Central Bank.

Long-term supply-side policies

In the long term, a robust currency depends on solid economic fundamentals. To strengthen the Naira, Nigeria requires a combination of low inflation, productivity growth, and economic and political stability.

However, at present, increasing interest rates in Nigeria might not yield a significant positive effect on the exchange rate.

Why?

This is because, despite high-interest rates, investors would be concerned about the elevated inflation in Nigeria.

To enhance the value of the Naira in the long term, the government needs to explore supply-side policies aimed at increasing competitiveness and reducing production costs.

For instance, initiatives such as privatization and regulatory reforms may assist the export industry in becoming more competitive over the long term.

Sustaining the value of the Naira over time requires the government to actively diversify the economy away from oil and promote other manufacturing sectors.

Reduce corruption

Corruption is gradually becoming synonymous with Nigeria because many political office holders are reluctant to use their wealth for the country’s development.

Instead, a significant number of these officials choose to invest in countries like the UAE, USA, and China, while also seeking medical services in the UK, Germany, and elsewhere. This trend is contributing to a gradual decline in Nigeria’s Gross Domestic Product (GDP).

In a report entitled “Impact of Corruption on Nigeria’s Economy” PricewaterhouseCoopers (PwC), a leading professional services firm in a report to the Federal Government led by its Country and regional Senior Partner West Market Area, Mr. Uyi Akpata, stated that corruption had impacted the Nigerian economy over time.

“The results of the study show that corruption in Nigeria could cost up to 37% of GDP by 2030 if it’s not dealt with immediately. This cost is equated to around $1,000 per person in 2014 and nearly $2,000 per person by 2030.

“The boost in average income that we estimate, given the current per capita income, can significantly improve the lives of many in Nigeria”.

Akpata

To sustain the value of the Naira, the government must find a workable way of combating corruption, irrespective of political affiliation.

End insecurity

The success of the aforementioned measures is heavily reliant on security. In some parts of Kaduna, Niger, Borno, Zamfara, Bauchi, Plateau, and Benue states—considered the food baskets of the nation—farmers are unable to access their farmlands due to the activities of Boko Haram elements and terrorist herders, among others.

The level of a country’s indebtedness also significantly influences its ability to address issues within its forex market.

However, “non-quantifiable elements like violence, instability, rural banditry and terrorism,” undermine the productive capacity of an economy, says Dr. Obadiah Mailafia, former CBN deputy governor.

Do Nigerians want a stronger Naira?

A strong currency is a mixed blessing. While it makes imports cheaper and can improve living standards, it also comes with drawbacks. A strong currency can make exports less competitive and lead to lower economic growth.