Naira exchange rate? A good problem!

One of the really emotive topics in the country today is the issue of the naira exchange rate.

To devalue or not to devalue?

I see a rainbow in this situation and that's why I say it's a good problem.

Although revisited, it still is a good problem

Yes, it's a revisited problem because Nigeria experienced these same problems (exchange rates, drop in oil production etc.) in the 1980's

and President Buhari , exactly as he does today, supported a strong currency in 1983/84. The questions remain;

Do we need a strong currency or do we need to be competitive?

One of the ways a country can maintain a strong currency is by defending its currency in the market place with foreign exchange reserves.

Unfortunately, we do not have adequate foreign exchange reserves

When a nation has inadequate reserves to defend it's fixed exchange rate policy, what happens is what we have now; a fixed exchange rate in official markets and a higher exchange rate in the parallel market (black market)

Will a 'weak' currency lead to slow growth?

A great example of why a weak currency does not lead to slow growth is South Korea. South Korea grew its GDP per capita from a record low of  $1,100 US dollars in 1960 to an estimated $24,500 in 2014.

It's interesting to note that, during this same period, one US dollar went from being exchanged at 63 Won in 1960 to 1,237  won in 2014.

South Korea chose to be competitive as a nation and today, is identified as one of the G-20 major economies and the most industrialized member country of the Organisation of Economic Cooperation and Development (OECD).

One of the arguments for a strong currency is the concern that non-oil exports depend on imported industrial supplies to exist and will be adversely affected by a weak currency. I say, the government can step in by subsidizing that cost rather than lead us on a path to not be competitive as a nation again.

What opportunities can we gain from a 'weak' currency ?

I'll share two (2) great opportunities;

♦ An increase in domestic demand for local products and services

No doubt, Nigeria is largely an import dependent nation but the hike in the exchange rate will make some consumer products or services become luxuries.

For instance, rather than travel out of the country for medical tourism, local options might be explored. It's a great opportunity for a local health care provider to partner with international medical experts who can travel into the country to carry out some medical surgeries within the country.

♦ A compelling business case for backward integration

Most manufacturing companies in Nigeria rely on foreign sources for inputs, contributing to the pressure on the naira.

The current volatility of the naira provides a compelling business case for these companies to look for local sources for some of their inputs in order to stay in business. 

The economic benefits we stand to gain from backward integration include ease in the demand for foreign exchange, creation of employment opportunity and the deepening of the market dynamics.

Tomilola Balogun writes @ www.tomiebalogun.com

Feel free to connect on twitter @tomie_balogun

Constructive and polite comments (whether assenting or dissenting) are most welcome.