The naira issue has been the topic of debate for a while now. Should we devalue or not? Can we cope with the effect of a devaluation? What happens if we don’t? And so on. Over the next few days, I and other colleagues-experts in their fields-will give views on a variety of issues regarding the naira devaluation debate.

To kick things off, it is useful to discard some bad ideas which have been tossed around for a while.

Bigger Number = Stronger Currency?

The first myth to debunk is the false idea that if you exchange a bigger number for a smaller number then the currency with a bigger number is weaker than the currency with a smaller number. You typically hear people say: “Wow, one dollar is exchanging for 16 rand. The rand is weak. The dollar is strong.” That kind of thinking is faulty mostly because it doesn’t take into account the purchasing power behind the currency.

For example, if an individual living in the US earns 300 dollars a month, then that is technically identical to an individual in South Africa earning 4800 rands a month, given that 1 US dollar exchanges for 16 rands. So long as that exchange rate holds then the rand is not weak or strong, it’s just the rand.

In reality, the strength or weakness of a currency has little do with what the actual exchange rate is. So although one Ghanaian cedi exchanges for 30 Japanese yen, you cannot say the cedi is stronger than the yen. Similarly, although one Turkish lira exchanges for six Mexican pesos, you cannot say the lira is strong and the peso is weak. That would be wrong.



In reality, the strength or weakness of a currency has little do with what the actual exchange rate is. So although one Ghanaian cedi exchanges for 30 Japanese yen, you cannot say the cedi is stronger than the yen. Similarly, although one Turkish lira exchanges for six Mexican pesos, you cannot say the lira is strong and the peso is weak. That would be wrong.

What then determines a currency that is “weak” or “strong”?

A weak or strong currency is one that is changing, or that everybody expects to change soon. For example, if the naira changes from 150 to the US dollar to 165 to the US dollar, then during the period the change is taking place the naira is relatively weak and the dollar is relatively strong. The same applies if the currency is expected to change soon. If everyone expects the naira to change from 197 per US dollar to 300 per US dollar, then the naira is weak relative to the dollar. The weakness persists as long as the expectations about the change persist. If the change eventually happens, the naira moves to 300 to a dollar, and everyone believes that is the end of it, then the naira is no longer weak. It is just the naira.

Weak Currency = Bad Economy?

The second myth to dispel is the idea that a country whose currency weakens consistently over time cannot grow. This could not be further from the truth.

The poster child of why weakening currencies do not imply slow growth is South Korea. South Korea grew its GDP per capita from about 1100 US dollars in 1960 to about 24,500 in 2014. What happened to its currency over the period? In 1960 one US dollar exchanged for about 63 won. Today one US dollar exchanges for almost 1200 won. In short, over the period where South Korea has “developed”, its currency has also weakened consistently.

…a currency that loses value over time is not the doom it is made out to be.

Similar patterns can be seen for some of the other fastest growing economies over the period, such as Chile, Vietnam, and Indonesia. The majority have grown relatively quickly even with weakening currencies. In fact, many countries try to weaken their currencies to boost growth. One of goals of Abenomics, a fancy name for policies implemented by the Japanese Prime Minister, was a devaluation of the yen to boost growth. China was accused for years of artificially weakening its currency.

There are many other examples from around the world. The Vietnamese dong trades at 22300 per US dollar today from about one dong per US dollar in 1983 and Vietnam still managed to grow at an average of 6.5% per year over the period. The Indonesian rupah trades at 11,800 per US dollar today from about 600 rupahs per US dollar in 1980 and Indonesia also still managed to grow at an average of 7% per year over the period. Bottom line, a currency that loses value over time is not the doom it is made out to be.

Devaluation = Uncontrollable Inflation?

The third myth is the idea that devaluations lead to runaway inflation, an idea that is not technically true. To be clear, devaluations do lead to inflation but not nearly as much as people think.



For example, the South African rand has devalued by about 40% in the last year yet inflation has ticked up by less than one percentage point to 5.2% from 4.4% a year ago. The Russian rubble has devalued by 126% since the middle of 2014 yet inflation has gone from 8% in mid-July of 2014 to about 13% today, although it peaked at around 16%. A significant increase, but nowhere near catastrophic.

…the reality is, devaluations do cause inflation but not that much… Ironically, according to some studies, the black market premium, i.e. the difference between the official exchange rate and the black market exchange rate is a bigger driver of inflation than devaluations.

Finally, we can look at Nigeria where the naira lost about 20% of its value between October 2014 and March 2015. Despite the devaluation, inflation, which was about 8% then, is still below 10%. If you add the fact that the dollar prices of some of our largest imports, fuel and wheat, have fallen to almost record lows then the inflation worry is minute.

So the reality is, devaluations do cause inflation but not that much. Despite a devaluation, the Central Bank still has lots of tools at its disposal to keep inflation in check. Ironically, according to some studies, the black market premium, i.e. the difference between the official exchange rate and the black market exchange rate is a bigger driver of inflation than devaluations.

Does Nigeria Have An Import Problem?

The final myth to bust is the idea that Nigeria has an import problem. You typically hear statements like “How can we be importing everything from toothpicks to fish. It is unsustainable.” Often left out of such statements is the fact that we have a N90tn economy. And you cannot have a N90tn economy that does not import. Is it odd that a N90tn economy would import N100bn worth of building materials or N26bn worth of shoes? No it’s not.

According to comparable data compiled by the World Bank, Nigeria imported only about 12.5% of GDP in 2014. Of the 160 countries for which the World Bank has data available, Nigeria had the lowest imports to GDP ratio. Côte d’Ivoire imported about 38.9% of GDP in 2014, Ghana imported about 48.9%, Mauritius imported about 63%, Belgium about 83.1% and Ireland about 95.4% of GDP.

Of the 160 countries for which the World Bank has data available, Nigeria had the lowest imports to GDP ratio.



So according to the data, we do not have an import problem. Even if you assume that 50% of our imports go unrecorded, that still leaves us at a healthy 25% of GDP, which is still not a problem.

However, we do have an export problem, highlighted by the fact that crude oil accounts for 90% of our recorded exports and crude oil prices are volatile. Recognising this key difference between an import problem and an export problem is very important because it determines that kinds of policies that should be implemented. Import substitution policies and policies that look to limit imports probably won’t work because they do nothing to tackle the real problem, which is an export one.

Nonso Obikili holds a PhD in economics and works as a researcher and consultant. He has published peer-reviewed articles in various international academic journals and blogs frequently on Nigerian economic issues.


http://blogs.premiumtimesng.com/myths-about-devaluations-by-nonso-obikili/

CNT read Al D's Jargons.

Jst Ftc

HBD Fantasticlala.

Finally had to read all.

D writer is sayin Bubu shud allow a free fall of the naira?

If he(CBN GOV dares Communicate that to bubu he will be seen as Trying to Be a PDP mole in an APC govnmnt


thus I predict $1=#600 in May D's yr.

I left it @#197 wen I left Aso Rock.

t

Very educative (y)

Very revealing article. I agree with most of the arguments of the author except the issue of importation not being a problem and devaluation not resulting in serious inflation.

The level of importation in Nigeria today is not sustainable considering the inadequate foreign exchange earnings. Again, if we are serious about creating jobs and becoming a major global economic player, we need to reduce our over dependence on importation and stimulate our manufacturing industry. China and India did not become the second and third largest economy by importation, they achieved the feat by manufacturing almost all their local needs and still manufacturing enough for exportation to other countries. He identified exportation as a problem but the fact is, we can't export when we are not even producing enough to meet local needs. We need to discourage importation to stimulate local production.

The argument that devaluation does not cause serious inflation is just weak. The truth is, the real rate of inflation that the people contend with is not really reflected in the inflation figures that the NBS comes up with. When we devalue, the first thing that will go up is the cost of fuel importation and that is what the present administration can't afford. In calculating the inflation rate, NBS takes a lot of items into consideration and so, the real effect of the increase in petroleum products is watered down in the overall rate.
Again, minimum wage of workers has remain the same since 2011 and inflation has risen by over 5%. Adding another 1-2% to the inflation rate as a result of devaluation without increasing workers salary is wickedness.

seunmsg:
Very revealing article. I agree with most of the arguments of the author except the issue of importation not being a problem and devaluation not resulting in serious inflation.

hmmm, neva believe you can copy & post such article. gud job

godoluwa:
hmmm, neva believe you can copy & post such article. gud job

What do you mean by copy and paste? Did I claim authorship of the article? Read very well and you will see that the author was dully referenced.

seunmsg:


What do you mean by copy and paste? Did I claim authorship of the article? Read very well and you will see that the author was dully referenced.

yeah bt neva misunderstand my post. I said that I neva believed that you can share such post because most of your members(APC e-supporters) are against devaluation of naira & not ready to listen to any constructive criticism about the present administration

godoluwa:
yeah bt neva misunderstand my post. I said that I neva believed that you can share such post because most of your members(APC e-supporters) are against devaluation of naira & not ready to listen to any constructive criticism about the present administration

Okay, now I understand you. Lalasticlala, this very interesting piece should be on front page.

Well understood. Thanks OP.


Check my signature for ur customised wristband

Educating article.

It's [size=15pt]LadyF[/size] again

godoluwa:
hmmm, neva believe you can copy & post such article. gud job

copy urs and paste

Am among those who didn't read that library.

okay o

Good points

However, the writer failed to mention that devaluation of a currency when it is not accompanied with increase in wages leads to a fall in Purchasing Power Parity which means that consumers have to be pay more for goods and services.

I also disagree with his notion on imports. He has made a lot of assumptions that are unproven i.e. the exact amount of total imports when we factor in unrecorded import activities. We have an import problem and curtailing them through restrictions while encouraging domestic production will solve the export problem he rightly identified.

What is the op writing? CRAP to the intellectuals. Educative to the dummies.

Have you ever made research as regard why you have the Federal reverse?

Have you ever made research as regard why money supply gets surplus and retracts within the shortest period of time?

Have you ever inquired why the dollar has to be the exchange rate against other currencies?

Ever wondered how the country debt gets paid and how?

Ever wondered modus operandi to getting world bank/IMF loan?

Do you think your country really owns the central bank/Federal reserve?


Well those are questions to ponder about to know why you a slave till you die in debt and your children continues the payment till they pass it down to their next generation.

Its not really about the Nigeria economy not viable it's about the hands that regulate the economy.

FEARLESSDUDE:
copy urs and post

do u understand simple english @all. check my conversation with op to av clear knowledge of my post.

T

nice

actually this is commonsense forex rate education, relevant and direct

not the kind of thrash propaganda commonsense of our senator

Only economically brilliant and intelligent young people will understand this write up.


Nice one

how does that add to our bergaining power of imported product and cost of living in Nigeria ?

Thanks for mentioning south korea and china, (economies that are largely export driven) in your analysis. Devaluing the naira without boosting exports will be largely suicidal for the Nigerian economy. Wages are sticky, they Hardly ever increase. Our economy depends largely on imported goods and servs. If the naira is devalued, expect the standard of living of the average salary earner to plummet drastically because of skyrocketing prices of consumer goods. The fed should focus on diversifying the economy, placing more emphasis on exploring solid minerals and boosting agricultural production, before moving to devalue the naira.

Good piece but i disagree with the part that says devaluation of the currency
vis a vis an import dependent country like ours doesnt fuel inflation.

Too long jare, somebody pls help to Summarize this passage.

Anayo Okpara
·
She is always at the church premises by 6am wearing some faded jeans, an old T shirt and some slippers. She always comes to clean the chapel and arrange the seats. For six years she has never missed a single Sunday coming to clean the place. On this faithful day a young man walked into the chapel while she was still cleaning. He went and sat down watching as the lady cleaned. He was impressed that a lady who looked quite good even in the old cloths and a scarf over her hair could be so dedicated to her work in church. He thought within himself that this was an unfortunate lady who probably had not gotten anyone to take care of her schooling and now she would probably be an orange seller or some petty trader struggling to make ends meet. He watched and within his heart he felt he now knew what God wanted him to do. When he had felt a compulsion to come very early to church he had not understood but now he thought he did. He went back to his car and took out two 50 cedis notes and when the lady finished her work and was about to leave he called her and commended her for her service and gave her the notes. She respectfully declined the gift but he insisted pressing it into her hands. He asked if she lived close by or if he could go drop her so she would not be late. She thanked him and told him that her car was nearby, but he did not comprehend or even try to understand what she had just said. He walked her out determined to find out all he could about this lady that God wanted him to help change her level. They walked out of the chapel with him telling her where he worked and how God had asked him to come early to church that day and how he believed God is directing him to help make a big difference in her life. He was so busy talking he had not realized they had walked directly to a car parked under some trees in the parking lot. The car made his one year old Benz look like a worn out wheel barrow. The lady opened the driver’s door stepped in and handed over her card to the man and said, “I believe God sent you here for a purpose, but I do not think it was to change my level, May be it was to change yours.” I am tempted to say it took a forklift to shut the young man's mouth and move him from the place he was glued to as the lady drove off. God had a purpose for bringing him to church that morning and that purpose was to teach him humility which he learnt well because now two people always clean the chapel when everyone fails to show up. Many times we think so highly of ourselves that where God sends us to learn we go trying to teach. We may be men created in the image of God but at one time ants shall be the professors seeking to impart knowledge to us only if we are humble enough to learn.
Stay blessed, be humble, trust and obey.

Clueless because you fail to talk about the government increasing minimum wage as regards to the inflation so that citizens will not suffer

And you also forget that importers will suffer it the most

If devaluation is not that injurious to the economy, I will advise Pmb to agree to naira devaluation asap. The gap between the official value and black market value is just too wide.

Don't devalue the Naira... period!