So tonight I read a friend’s bbm display message that read “US increases interest rates, RIP Naira. It got me thinking about our economy. I also had to remind myself some of the economics I spent 4 years studying (problems of an economist-cum-tax professional).
Anyway, I realised that that meant the Dollar would be further strengthened against the Naira (in lay man terms that means you get more Naira for every dollar – as if the 260 Naira a Dollar rate in the parallel market is not bad enough).
Well you may say that’s no news, we all know that. Exactly, we all know how bad our Naira has devalued in the recent past and the slump in oil prices is not helping the economy’s matter.
However, I have always been an advocate of this saying “to solve a problem, you need to first discover the root cause”. Tonight, I am not going the corruption angle, we’ll keep it strictly economics (they say if you can teach a parrot to say Demand and Supply, you’ve made an Economist of the bird). I want us to explore one of the root causes of our monetary woes in Nigeria and see if through those lens we can discover a lasting solution.
Firstly, why would the Naira weaken against other currencies? The answer is simple, the demand for Dollars, Euros, Pounds, etc, is higher than the supply in the Nigerian foreign exchange (FOREX) market. Thus the market forces action will push up the price.
Secondly, why is the demand for foreign currencies high in the Nigerian FOREX market?
The reasons for this are varied but I’ll go with one – consumption. There is an economic theory that increased consumption is beneficial to a nation’s economy in the long run. However, in the case of Nigeria, our consumerism has stilted our economic growth.
This is because we consume what we don’t produce. Our flashy lifestyle and love for the best things, unfortunately means that we enrich other nations at the expense of our own country. As a consuming nation, we are always importing one thing or the other, or even demanding payment in foreign currencies for transactions started and completed locally!
The Central Bank of Nigeria in its attempt to curb that menace, placed restrictions on foreign exchange activities but this has not really helped the matter. why? because you and I have not stopped demanding for Dollars. Rather there needs to be an enabling environment for local production and good quality exports in order to reduce the demand for imports and increase the demand for Naira in the foreign exchange market.
We need to all start patronising “made in Nigeria” for almost everything or at least have strong exports that would ensure our balance of payment is not deficit. Our human capital (education) must be given proper attention in order to develop the right skills required to manufacture locally.
There are other factors that can help create that much needed enabling environment – improved infrastructure: roads, railways, constant power supply will all go a long way. Rule of law and strong institutions are also a necessity. The government can also consider closing the borders temporarily but this would be successful only if the above have first been put in place.
Then we can be a consuming and producing nation with a strong resurrected currency.