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It's stability, stupid! Stability of the naira is key to Nigeria’s growth 13 Mar 2024

The exchange rate of Nigeria’s naira to stronger foreign currencies has been a hot topic lately. Although Nigeria’s economic structure, the dollarisation of its budget, and reliance on oil revenue contribute to these dynamics, it is important to understand that the emphasis on foreign exchange rates is misplaced. Many citizens have transformed into a walking bureau de change, with everyone – many of whom have never held a US dollar note – closely monitoring exchange rates.

Contrary to popular belief, a strong exchange rate doesn't necessarily equate to a relatively stronger economy. Take, for example, the scenario where the Canadian dollar appreciates against the US dollar. While vacationers may rejoice at the increased purchasing power abroad, Canadian manufacturers would lament, fearing a loss of competitiveness as their US consumers may find their imported products becoming more expensive.

What Nigeria truly needs is not a stronger naira but its stable exchange rate. Stability provides a conducive environment for investors to make informed decisions and plan for the long term. It encourages multinational corporations like Tommy Hilfiger and others who currently have factories outside North America to establish factories within our borders, creating jobs and driving economic growth. Moreover, a stable exchange rate will encourage and attract companies from English-speaking countries to outsource IT and customer service jobs to Nigeria, leveraging our skilled workforce and boosting employment opportunities.

The prevailing fixation on the naira exchange rate underscores the need for enhanced public education on the valuation of currencies and their true implications.

This piece is not about dissecting the ever-present arbitrage incentives that encourage the manipulation of the value of the naira or assigning its blame to the Central Bank of Nigeria (CBN) for its policy complicity. Instead, it's a call to educate Nigerians about the fallacy of prioritising a strong naira. Our goal should be a stable exchange rate – which would underpin the country’s economic resilience, foster investor confidence, and propel Nigeria towards sustainable prosperity.

As Arvind Subramanian, India’s former Chief Economic Adviser, rightly pointed out, the belief that a strong currency equates to national growth and economic strength is misguided. Instead, foreign exchange competitiveness is paramount for growth. He advocated for a rupee exchange rate that promotes exports, emphasising the importance of balance and stability in currency valuation.

It is important to understand that the correlation between a strong currency and a robust economy is not always straightforward and depends on various factors. While a strong currency can indicate economic strength, it is not the only factor to consider. The relationship can be more nuanced.

Japan provides a compelling case that challenges the conventional wisdom of equating a strong currency with economic might. In 2003, one Japanese yen exchanged for N1.28 and recently exchanged for N10.35. These exchange rates could suggest that the yen is weak. But, in actual fact, Japan's economy has remained strong. Its success lies not in the strength of its currency but in its stability.

The yen's stable value provides a conducive environment for economic planning, investment, and trade. Unlike countries grappling with the consequences of volatile currency movements, Japan enjoys a level of predictability that fosters long-term economic strategies.

The yen may not be among the world's strongest currencies in terms of its exchange rates, but Japan's economic strength is unmistakable. The nation boasts advanced technology, a high standard of living, and a resilient economy that has weathered various global challenges.

The Japanese yen serves as a testament to the positive correlation between currency stability and foreign investment. Despite not being the world's strongest currency, the yen's stability has contributed significantly to Japan's ability to attract foreign capital.

Let's compare Nigeria with some other economies that possess lower currency values but demonstrate robust economic performance. India's currency, the Indian Rupee, has a lower value than some strong currencies. In 2019, one India Rupee exchanged for N5.18 and currently trades at around N18.63. Despite this relative weakness, India stands as one of the world's fastest-growing major economies.

The Indian government's focus on economic reforms, technological advancements, and a large, diverse market has contributed to sustained growth. India's experience illustrates that while a weaker currency can make exports more competitive, it is the broader economic policies and diversification strategies that fuel long-term development.

The South Korean won is another example. South Korea, with its lower-valued currency compared to other currencies, has emerged as a global economic powerhouse. In 2019, the won exchanged for N0.31, and today it exchanges for NGN1.16. The country's success lies in a robust manufacturing sector, technological innovation, and strategic investments in education and infrastructure.

The South Korean example demonstrates that a lower currency value can be leveraged effectively when accompanied by a strong commitment to economic development and global competitiveness.

Turkey, with its unique geographical location bridging Europe and Asia, has a sizable and diverse economy. The Turkish lira has had a lower value compared to other strong currencies. In 2019, the lira exchanged for N65.87 and currently trades at N49.63.

It is important to recognise that currency value is just one aspect of a country's economic strength, and other factors such as GDP, economic diversification, government policies, and global trade play vital roles.

A strong currency makes imported goods more affordable for consumers, which can benefit those who rely on imported products. Individuals who travel internationally benefit from a strong currency as their purchasing power is stronger in foreign countries. But some countries intentionally keep their currencies weak to boost demand for their exports, which can lead to increased economic activity and job creation.

Nigeria's low productivity levels have hindered its ability to fully capitalise on the benefits of a weak currency, limiting the potential for job creation and economic growth. A strong currency can pose challenges for domestic companies by making their products relatively more expensive in international markets, potentially reducing competitiveness and export demand.

Maintaining a balance between currency strength and weakness is crucial. While a strong currency benefits travelers and consumers of imported goods, a weak currency can stimulate job creation and support domestic industries. Striking the right balance is essential for sustainable economic growth and stability.

In Nigeria's case, addressing productivity challenges alongside currency considerations is vital for maximising the benefits of currency fluctuations and fostering economic development. Additionally, implementing policies that support domestic industries and enhance productivity can help mitigate the adverse effects of currency fluctuations on the economy and job market.

According to the World Bank, Japan consistently maintains one of the lowest inflation rates among developed economies, a testament to the stability of its currency. This stable economic environment provides a conducive atmosphere for long-term economic strategies, fostering advanced technology, a high standard of living, and a resilient economy that has weathered various global challenges.

In the realm of economic discourse, the focus on a nation's currency often revolves around its strength, with pundits fixated on exchange rates and international standing. However, in the case of Nigeria, the emphasis should shift towards a more nuanced perspective – one that underscores the paramount importance of currency stability rather than sheer strength.

The lesson for Nigeria is clear – stability can be a more potent driver of economic growth than sheer currency strength. In a globalised world where investors seek predictability and reliability, a stable currency becomes a beacon of assurance, attracting much-needed foreign investment and fostering domestic business confidence.

A focus on currency stability rather than a relentless pursuit of a stronger naira is crucial for fostering a healthy trade environment. By promoting a stable exchange rate, the country can enhance its competitiveness in the global market, making Nigerian goods and services more attractive to international buyers.

Data from the United Nations Conference on Trade and Development (UNCTAD) reveals the positive correlation between currency stability and foreign direct investment. Countries with stable currencies tend to attract higher levels of FDI, fostering economic growth and development.

The volatility of the naira often deters potential investors. On the other hand, Japan's stable yen is a magnet for foreign investment, contributing significantly to its economic strength.

Data from the Nigerian Bureau of Statistics indicates that periods of currency stability in the past have correlated with improved trade balances, showcasing the positive impact stability can have on the nation's economic performance. The relationship between currency stability and trade balance cannot be overstated. A stable currency provides a conducive environment for both importers and exporters to plan and execute their strategies. In contrast, a volatile currency complicates matters, leading to uncertainties that can adversely impact the trade balance.

Stability in the currency is not only a boon for businesses and investors but also for the general population. Inflation, often exacerbated by volatile currencies, erodes the purchasing power of citizens, leading to increased costs of living. A stable currency, on the other hand, helps curb inflationary pressures, ensuring that the everyday essentials remain affordable for the majority.

Nigeria is currently grappling with inflationary challenges, and a shift towards prioritising currency stability can contribute to managing inflation more effectively. This, in turn, translates into a better standard of living for the citizens, fostering social stability and economic resilience.

When the naira experiences rapid and unpredictable shifts, it disrupts the normal functioning of the economy. Importers face challenges in planning and pricing, exporters grapple with unpredictable returns, and investors become wary of the risks associated with such currency turbulence. In essence, the constant flux undermines the foundation for sustainable economic growth.

In the pursuit of economic prosperity, Nigeria must recalibrate its focus from a stronger currency to the more comprehensive objective of currency stability. Japan's example offers a valuable lesson – a stable currency forms the bedrock of a resilient and prosperous economy.

By prioritising currency stability, Nigeria can unlock a myriad of opportunities. It can enhance trade competitiveness, attract foreign investment, and foster a more predictable economic environment for businesses and consumers alike. As the world becomes increasingly interconnected but hyper competitive, the value of domestic macroeconomic stability cannot be overstated. It's not just about the strength of the currency; it's about the stability that ensures sustained and inclusive economic growth.

It's stability, and that's not just a catchphrase – it's the key to Nigeria's economic future.

Olajide Olutuyi, a Financial Nigeria Columnist, holds first degrees in Computer Science from the Federal University of Technology Akure (FUTA) and Management from the University of Lethbridge, Canada; an MBA from the Australian Institute of Business; and a certificate in Social Impact Leadership from University of California, Berkeley, Haas School of Business. He is an Instructor at Bow Valley College's Chui School of Business, Calgary. He is also the Co-Founder/CEO Top-Olax Energy Limited and the Executive Director, Samuel Olutuyi Foundation. Email: Olajide@samuelolutuyifoundation.org.