IN an article earlier this month, we explained why further naira devaluation would constrain demand and economic growth, and also add millions more to the population of impoverished Nigerians, who are currently unemployed or live on less than
The narrative, this week, will answer questions on the impact of a stronger naira exchange rate such as N80:
Why do you believe that a stronger naira is better for the economy?
Historical evidence clearly confirms that the trajectory of deepening poverty in
So, how does naira exchange rate affect inflation?
Inflation is generally defined as excess money chasing too few goods; in other words, inflation will be restrained, when optimal naira values exist in the system. For example, the substitution of naira allocations for say,
Consequently, inflation will fall with a stronger naira rate, as there would be less surplus naira chasing available goods and services; lower inflation rates will increase the purchasing power of all income earners, while also reducing production cost. Indeed, economic best practice inflation rate is often less than two per cent in successful economies. In reality, our current inflation rate of eight per cent means that static income earners (e.g. pensioners) will lose 40 per cent of their incomes' purchasing power every five years.
Does a stronger naira positively affect interest rate?
In the earlier article "Should the Naira be Devalued", (please see www.lesleba.com) we explained that existing high interest rates are the result of CBN's self-infliction of surplus naira on the economy. We also explained that systemic naira surplus increases with lower naira exchange rates; thus, a stronger exchange rate of, say, N80:
In such event, CBN will not become compelled, for fear of inflation fueled by surplus naira, to sustain disruptively high Monetary Policy Rates (MPR) that trigger over 20 per cent cost of funds to the real sector. Thus, with reduced or optimal money supply, the apex bank will inevitably reduce its MPR (i.e. rate at which it lends to commercial banks), from the current disturbingly high level of 12 per cent, to benign levels that will encourage banks to, in turn, provide credit to the real sector at rates that support increasing productivity and more job opportunities.
Evidently, lower cost of borrowing will reduce interest rates, so that made-in-
Nonetheless, we must recognise that no country successfully grows its economy when government deposits with banks earn zero per cent, while government simultaneously pays double-digit interest rates to the same banks, just to remove perceived surplus naira from the system.
Will a naira exchange rate of N80:
An exchange rate of N80:
What impact would such entrepreneurial impetus have on our economy?
Well, the renewed spirit of enterprise would ultimately lead to the creation of more job opportunities, as new investors enter the market, while established industrialists expand their capacity utilization, or retool their plants for increased production. Ultimately, the wages earned by the increasing army of newly employed workers, will also create additional consumer demand that will further invigorate the industrial climate, and instigate rapid industrial expansion, with even more job opportunities.
Will a stronger naira eliminate fuel subsidy?
Yes, it would; for example, if 1litre of petrol sells for
Furthermore, if however, petrol continues to sell for N97/litre instead of the actual market price of about N200/litre, the attendant subsidy value would increase to N103/litre, instead of the current N53/litre with exchange rate of N160:
Nonetheless, a stronger naira of N80:
Thus, the sum of over
Evidently, it will cost this and future generations an arm and a leg, if we had to borrow
Will a stronger naira reduce our national debt burden?
As earlier explained above, a stronger naira will reduce the cost and size of government borrowing, as cost of funds will fall for both private and public sector borrowings. Additionally, government need not increase its debt burden, by providing funds to the banks at zero per cent, and irrationally borrowing back the same funds at double-digit interest rates in order to manage surplus naira and contain inflation.
In conclusion, however, the distortions associated with excess naira will be harmoniously resolved if dollar certificates are adopted for the allocation of dollar-derived revenue.
- Boyo is a public finance analyst.
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