By Henry Boyo

IN an earlier article, (May 2014), this writer explained why further naira devaluation would constrain demand and economic growth, and also deepen poverty.  Furthermore, an unyielding, suffocating, self-inflicted, unusual burden of surplus Naira was also identified as the primary cause of weaker Naira exchange rates, despite, relatively, bountiful dollar reserves, since 1999.”


The narrative, this week, will answer questions on the impact of a stronger naira exchange rate, such as N80:$, on critical indices like inflation, interest rate, fuel subsidy, national debt and job creation.  The above title was earlier published on May 26, 2014.

“Why do you believe that a stronger naira is better for the economy?

Historical evidence clearly confirms that the trajectory of deepening poverty in Nigeria, correlates loyally with Naira depreciation from stronger than 1:1 in the 70s and early 80s to current rate of about N160:$1.  In practice, a much stronger naira should yield more benefits to Nigeria’s economy, and halt deepening poverty; conversely, any naira depreciation will further fuel inflation, deepen poverty, and widen the already huge gap between the rich few and poor masses.

So, how does naira exchange rate affect inflation?

Inflation is generally defined as excess money chasing too few goods; consequently, inflation will be restrained, when optimal naira values exist in the system.  For example, the substitution of naira allocation for say, $1bn distributable revenue at a rate of N160:$1, will immediately increase the actual naira stock in banks by N160bn; furthermore, if CBN’s subsisting mandatory Cash Reserve Ratio is, for example, 10%, the commercial banks’ could further leverage ten-fold on this fresh amount of N160bn to seriously compound the burden of surplus naira and inflation in the economy.

Conversely, if the same $1bn allocation was exchanged at a stronger rate of say, N80:$1 by CBN, the addition to money supply, from such naira allocation would be reduced nominally, by at least 50%, to just N80bn.

Similarly, inflation will fall with a stronger naira rate, as there would be less surplus naira created by CBN to buy up more goods and services; lower inflation rates will, however, increase the purchasing power of all income earners, and reduce cost of production.  Indeed, economic best practice inflation rate is often less than 2%;  thus, our current inflation rate of 8% (2014) means that static income earners (e.g. pensioners) will lose 40% purchasing power of their incomes’ every five years!

Does a stronger naira positively affect interest rate?

In another article titled “Should the Naira be Devalued” (May 12th 2014,, this writer explained that existing high interest rates are caused by CBN’s conscious self-infliction of surplus naira on the economy; Furthermore, lower naira exchange rates will also evolve whenever the ‘poison’ of Systemic Naira surplus increases; consequently, a stronger exchange rate of, say, N80:$1 will conversely reduce the challenge of disenabling excess naira by at least 50%, and thereby, also restrain inflation.

Thus, with a stronger Naira, CBN will never be forced, by the fear of inflation, fueled by surplus naira, to knowingly sustain disruptively high Monetary Policy Rates (MPR) that will in turn, trigger over 20% cost of borrowing to real sector investors.  However, with reduced or near optimal money supply, the apex bank will invariably reduce its MPR (i.e. rate at which it lends to commercial banks), from the current, disturbingly high level of 12%, to more benign levels, below 5%, so that banks can, in turn, lend to investors at rates that facilitate increasing productivity with more job opportunities.

Evidently, if cost of borrowing is cheaper, Made-in-Nigeria goods will become more competitive against imports. Thus, a stronger naira will stimulate productivity, with cheaper Made-in-Nigeria goods, and also provide increasing jobs opportunities.

Nonetheless, we must recognise that no country can successfully grow its economy, if governments’ deposits in banks, earn zero interest, while the same government is simultaneously inexplicably, paying double-digit interest rates, to the same banks, in order to remove perceived surplus naira values from the system, and restrain inflation.

Will a naira exchange rate of N80:$1 have any other positive economic impact?

An exchange rate of N80:$1 will obviously enhance the naira’s purchasing power. Thus, the N18,000 minimum wage, for example, which is currently equal to about $110, would now be worth $220 per month. Furthermore, the additional consumer demand created by 100% higher purchasing power of Naira incomes, would also encourage local entrepreneurs to produce, particularly if cost of borrowing also falls well below 10%.

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 would expand their capacity utilization, or retool their plants to expand production.  Ultimately, the wages earned by the increasing army of freshly employed workers, will also create additional consumer demand, that will further invigorate the industrial climate, to instigate rapid industrial expansion, with even more job opportunities in tow.

Will a stronger naira eliminate fuel subsidy?

Yes, it would; for example, if petrol sells for $1/1 litre ex refinery worldwide, as a commodity, this would be equivalent to N160/litre in Nigeria.  If however, the naira rate falls from N160:$1 to, say, N200:$1, the same petrol would now also sell for N200/litre ex-refinery.

Nonetheless, if 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 when Naira exchange rate is N160:$1.

However, a stronger rate of N80:$1 will invariably reduce petrol price, even without subsidy, to N80/litre; thus billions of dollars will be saved annually, with the total elimination of fuel subsidy.  Indeed, a petrol tax of N17/litre or more can be levied by government. Thus, the sum of over $12bn (N2tn), presently, allegedly frittered away annually as fuel subsidy, will become available for rapid infrastructural enhancement in the critical areas of education, health, transportation, etc.

Will a stronger naira reduce our national debt burden?

A stronger naira will reduce the cost and size of government debts, as cost of funds will fall for both private and public sector borrowings. Additionally, government will not need to, increase its debt burden unnecessarily, by recklessly funding banks at zero percent, while irrationally and recklessly turning round to borrow back the same funds from the same banks, at double-digit interest rates, just to manage perceived 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-denominated revenue.”



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