By Ubong Mkpesit
Let me begin by establishing the fact that the title of this piece is not mine. It is a title of a book published in 2014 by Princeton University Press. The author is Jeffry Frieden – a specialist on the politics of international financial relations. The decision to use the title of his book is because it suits the objectives of this write up.
Let me also establish that this article
is not a review of Frieden’s book, but an analysis of Nigeria’s current
economic situations, with special focus on exchange rate.
Exchange rate is the price at which a
country’s currency is exchanged for another country’s currency (for example,
the Nigerian Naira and the U.S. Dollar).
Exchange rate is considered the most
important price in any economy because it affects all other prices, including
the prices of food and non-food items – the reason Nigeria’s inflation rate as
at July 2024 is put at 33.40%, in contrast to 9.20% recorded in the
corresponding period of 2015.
Exchange rates are also very critical to
the global economy because they influence all international economic
activities, including the movement of capital and non-capital goods from one
country to another. Even when it comes to getting loans from international
organisations like the World Bank, exchange rate is also considered. Most times,
countries (especially the developing countries) are asked to review their FX
rates under what is known in international finance as ‘Structural Adjustment
Programme’ before they could be considered for loans. The review is always to
ensure that the FX rates of these developing nations are not in competition
with those of the developed economies like the U.S. If you are looking for the
right words to describe this, simply call it “Currency Politics: The Political Economy
of Exchange Rate Policy”.
In Nigeria today, there is high cost of
living. Most things that were affordable some years back are no longer
affordable. Not everyone can now afford a bag of rice, for instance. Why is it
so? The country is an importing nation. Most of the products used in the
country are imported. Those produced in the country, most of the materials used
are imported. Is the Nigerian Naira a global currency? No! Can it be used to
import anything from let say the U.S. or China? No! This is where the country’s
monetary authority (Central Bank of Nigeria) needs to take the issue of
currency rate seriously. They should stop devaluing the Naira.
In macroeconomics and international
finance, there is a concept called ‘currency war’. Another name for it is
‘competitive devaluation’. Currency war is when a country deliberately lowers
the value or worth of its currency for trade related reasons. A country can
decide to devalue its currency because the other country producing the things
it produces has done so. That is because importers will always go to a country
with favourable exchange rate policy or regime. A case study as far as currency
war is concerned is the U.S-China currency war of 2019.
Nations adopt currency war because currency
devaluation comes with some benefits. But the benefits are mostly enjoyed by
countries that are industrialised, and are more of export than import. Unfortunately,
Nigeria is not yet an industrialised nation, and is more of an importing nation
than exporting nation – statistics on its trade balance can attest to this.
What is the way forward, I mean the solutions to the high cost of living in Nigeria?
1. Fixed exchange rate should be adopted as against floating exchange rate. Floating exchange rate means a currency’s value is determined by the market forces of demand and supply. The fixed exchange rate, no doubt, comes with some challenges – one of them being the depletion of foreign reserves; but the government, considering the economic hardship being faced by the people, must face the challenges that come with fixed exchange rate to at least temporarily stabilise the economy.
2. The Naira should be revalued. By this, I mean the Central Bank of Nigeria should stop devaluing the Naira. Currency devaluation implies that businessmen/women will need more Naira or units of it to a get a single United States Dollar or any other global currency. Official exchange rate is currently at N1,646/1$. This is not good for any country that wants the best for its citizens.
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| Dr. Olayemi Cardoso, Governor of the Central Bank of Nigeria |
3 3. Benchmark Lending Rate should be reviewed downward. This is because Nigeria’s inflation is not always caused by excess money supply as often stated by some monetary authorities. Benchmark Lending Rate is currently at 26.25%. This is too much. Benchmark Lending Rate or Monetary Policy Rate is the interest rate at which the CBN lends to commercial banks. If CBN lends to commercial banks at 26.25%, at what rate do you think banks would lend to individuals and businesses? When a lending rate is high, most businesses would not be able to borrow to expand their businesses, and may even fold up due to shortage of funds. And when businesses fold up, workers are rendered unemployed.
A 4. Additionally, Nigeria should reintroduce fuel subsidy because the removal has failed to yield the expected results. This is particularly necessary because fuel is among commodities considered in microeconomics as ‘public good’.
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Ubong
Mkpesit is a Nigerian business journalist and a finance expert.
Contact him on +2348106758849
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