Last updated on September 5th, 2023 at 10:19 am
One of the major questions for Nigerians every day is: why is Naira losing value? What will be the effects of a stronger US dollar against the local currency?
Since the Central Bank of Nigeria (CBN) rolled out some FX policies, the naira has lost more than it gained in Nigeria’s history. At the time of this update (August 22, 2023), the $/NGN 883/910 (buy/sell rate) and $/N761.32 at the I&E window.
We’re taking a look at policies the Nigeria government can consider to increase the value of the Nigerian Naira against other currencies.
In the 1970s, the Naira was more valuable than the US dollar. Today, the reverse is the case, It has gone bad that one US dollar can buy as much as NGN670 Naira or more at the parallel market as CBN halt the sales of forex to Bureau De Change operators in Nigeria thereby creating scarcity, we analyzed the implications of such action in one of our articles, it can be found at: https://infomediang.com/implications-cbn-stops-forex-sales-to-bdc-operators
The question on the mind of investors is how can Nigeria’s apex bank increase the value of the Naira against the US dollar, Euro, Pounds, and other currencies.
Can Nigeria’s government bring back the glory of the Naira against other currencies around the World? What can the government do to encourage investors to store their wealth in Naira without losing value?
Do Nigerians want a stronger exchange rate?
A strong currency is a mixed blessing. It makes imports cheaper and can improve living standards. However, it comes with some drawbacks because it can also make exports less competitive and lead to lower economic growth.
So, let’s take a look at some of the reasons why the naira is falling against the US Dollar, Pounds Sterling, Euro and major currencies in the foreign exchange market
Why is the Naira losing value?
There are many reasons why the Naira continues to drop against other major foreign currencies at the FX market, but some of the are:
- Importing more than exports
- Pressure on the foreign exchange market
- Country’s gross demand for dollar
- Inability to reduce inflation
- Poor economic and monetary policies
- Unabated corruption. Corruption can be found in any part of the world, but the impunity among the political class in Nigeria shows how inhumane Nigerian politicians can be.
- Insecurity. Local production will be affected in an unsecured environment like Nigeria. Only a few foreign investors can take the risk of investing in a country where gunmen operate any time of the day.
What exactly can increase the value of Naira?
Below are some of the measures authorities can take to increase the value of the naira
Our number way of increasing the value of the Naira is to expand exports. At the moment, Nigeria gets most of its FX from the sale of oil.
A few weeks ago, we all witnessed trouble for the naira escalated due to the downward trend of the price of crude, which accounts for more than 90% of Nigeria’s foreign exchange earnings. That’s one of the disadvantages of over-reliance on crude oil earnings. Global demand will determine which direction Nigeria takes
Encourage SMEs to produce goods that can be exported, motivate cocoa farmers, and support groundnut farmers in the North.
The Federal Government should consider exporting quality goods and services. To achieve this, manufacturing companies in Nigeria should concentrate on producing quality goods that meet the global standard for exportation.
This way, revenue generated from export will increase the inflows of FX instead of relying solely on the export of oil and the craze for forex will drastically reduce, thereby pushing the Naira up against the US dollar. Thankfully, the CBN launched 100 for policy on October 25, 2021, with the core mandate of boosting local manufacturing. It’s a good step in a good direction.
Ease pressure on the foreign exchange market
One of the ways to increase the value of Naira is to ease the pressure on the foreign exchange market in order to meet the high demand for hard currency in the country, the World Bank offered a similar suggestion a few weeks ago.
World Bank country director, Shubham Chaudhuri, was quoted by 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.”
A few days back, On March 27, 2020, the CBN stopped the sale of forex to BDC operators as the country faced an imminent lockdown due to the coronavirus pandemic.
Since then, the exchange rate at the unofficial market moved from N395/$1 on March 27, 2020, to N480/$1, as we write (October 13, 2020) it’s still N460/$1 at the blackmarket rate, showing only about N20 appreciation.
Sell foreign exchange assets and buy their own currency
The CBN, which is the official monetary advisor of Nigeria’s government should encourage the Federal Government to toe the steps of China and buy US government bonds. For instance, the record shows that China has over $1 trillion of US government bonds.
What do government bonds mean for another country?
Let’s use China as a case study here: Imagine what happens to the Chinese Yuan if it sells its Treasury bills and brings back the proceeds to China?
This will automatically cause a depreciation in the dollar against the Chinese Yuan, thereby making the Yuan appreciate.
This is what the Chinese government has been doing overtime, buy treasury bills of other countries and bring back proceeds to China.
As we write, $1 can only buy less than CNY7, that’s commendable.
“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,” says economicshelp.org
Nigeria can do the same.
Higher interest rates
Economists propounded that higher interest rates would attract some inflow of money, which occurs when banks and financial institutions move money to other countries to take advantage of a better rate of return on saving.
Nigeria Naira can regain its value if banks take advantage of this, though this economic strategy of increasing the value of the currency has its downs because higher interest rates may reduce the rate of economic growth.
Effects of higher interest rates may set in if this isn’t strategically implemented by a developing country.
For instance, during the recession, higher interest rates would not be suitable due to side effects on economic growth.
Reduce the country’s gross demand for dollar
One of the long-term solutions to make naira regain its value is to reduce the country’s gross demand for the dollar.
The fastest way to do this is by reducing importation of goods we have comparative cost advantage e.g crude oil, the refineries can be fixed so as to reduce dollars expended on re-importation of the finished products of crude oil (petroleum)
Currency Credible Assurance
Have you ever asked why Switzerland is referred to as ‘safe haven’ currency? Or why do corrupt Nigerian politicians move their loot to the Swiss bank?
This is a result of assurance from the Swiss government as a result of its stability that was targeting a higher exchange rate even as other currencies face turbulent times or recession.
When there is currency credible assurance from the government, this might encourage speculators to move money into Nigeria.
Today, how many investors are buying Nigeria naira compared to Swiss Francs? This must also be done with caution so as not to cause a problem for exporters.
Demonetization is not strange to Nigeria. In 1984, Nigeria underwent a demonetization process, when the government changed the colour of all currency notes in circulation.
“Demonetization is the act of stripping a currency unit of its status as legal tender. It occurs whenever there is a change of national currency: The current form or forms of money is pulled from circulation and retired, often to be replaced with new notes or coins.”-investopedia
Demonetization could be carried out to curb money laundering and eliminate black money in the financial system.
It also acts as a measure of repairing the relationship between monetary aggregate and aggregate output and a measure of reasserting monetary control, and restabilising financial stability.
Ghana and India have done a similar thing in the past.
With the currency hyperinflation cost of goods in Nigeria, bringing back the value of Naira may be difficult.
Nigeria’s inflation is relatively higher than competitors, some of the goods produced in Nigeria are even more expensive than the imported ones.
Inflation has to be lower than competitors, that’s when the country’s goods will become more attractive and demand will rise because lower inflation tends to increase the value of the currency in the long term.
To make naira regain its value, FG needs to reduce inflation, Nigeria’s government and the CBN can pursue tighter fiscal and monetary policy and also supply-side policies.
Long-term supply-side policies
In the long term, a strong currency depends on economic fundamentals. To have a stronger exchange rate of Naira against other currencies, Nigeria will need a combination of low inflation, productivity growth, and economic and political stability.
Presently, if Nigeria increases interest rates, this might not have any major positive effect on the exchange rate.
This is because, despite high-interest rates, investors would be concerned about the high inflation in Nigeria.
To increase the value of the Naira in the long-term, the government will need to try supply-side policies to increase competitiveness and cut costs of production, for example, privatisation and cutting regulations may help the export industry become more competitive in the long-term.
To sustain the value of the naira in long term, the government would have to try and diversify the economy away from oil into other manufacturing.
Corruption is gradually becoming synonymous to Nigeria because the political office holders are not ready to use their wealth to develop the country.
Most of the political office holders prefer to invest in UAE, USA, China and patronise hospitals in UK, Germany and many thereby gradually pulling down Nigeria’s Gross Domestic Product (GDP).
In a report entitled “Impact of Corruption on Nigeria’s Economy” PricewaterhouseCoopers (PwC), a leading professional services firm, a few weeks back 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 stated.
To sustain the value of the Naira, the government must find a workable way of fighting corruption regardless of political affiliation.
The success of the above measures largely depends on security. Farmers can’t access their farmlands in some parts of Kaduna, Niger, Borno, Zamfara, Bauchi, and Benue states that are food baskets of the nation. They were sacked by Boko Haram elements and terrorist herders among others.
The level of indebtedness of a country affects how it can fix 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.