Welcome to another Monday and newsletter. If you are like me, you must be wondering how fast the month of July went. Whether it was fast or slow, I trust it was a good one for us all.
Last week, many Nigerians watched with a combination of shock and confusion as the value of our currency (in the parallel market) did a sharp nosedive in a matter of days from N630/$ to N700/$.
Irrespective of the side of the divide you find yourself on – whether you are “Team float the Naira” or “Team defend the Naira”; you will agree with me that what we are dealing with is more fundamental.
In response to these fluctuations, a foremost economist – Bode Agusto released a paper suggesting ways of managing the country’s exchange rate.
In his paper, he explained that there was a difference in annual inflation of 10% between Nigeria and US and as such, it is expected that our currency should devalue by that rate against the US Dollar (USD).
In continuation, he discussed the 3 principal ways of exchange rate management –
- Pegging method – where a country’s currency is fixed/pegged against the dollar. Many oil-producing countries such as Saudi Arabia and Qatar fall in this category. They sell the USD at rates so determined by them. We currently also practice this method. Unfortunately, as we all know; we haven’t been successful primarily due to the unavailability of USD.
- Floating method – where the rate of the currency is determined by market forces (demand & supply). Those who practice this successfully are countries whose inflation rates typically mirror that of the US such as the UK, Japan, and the Eurozone. He believes this is not an ideal option for Nigeria given the significant difference in inflation rates as well as our dwindling oil revenues.
- The crawling peg method – where a country’s currency is pegged close to the market rates and allowed to float (depreciate or appreciate) from there using the difference in annual inflation against the USD as a guide. This is the method being recommended for Nigeria in the face of our current situation. He recommends starting with a rate of N600/$ and allowing for an annual deprecation of 10%. African countries like Kenya and Botswana have successfully used this method for several years.
From the above, it is clear that the Naira may find its equilibrium at a rate in the region of N600 to N700/$. This information is critical to both individual investors and business owners as it, unfortunately, means prices may not come down (unless the root cause of inflation is addressed).
As such, we need to budget and plan accordingly. It means restrategizing our projections as well as expanding our scope of thinking.
Personally, I don’t see it as a disadvantage but as an opportunity to think outside the box and adjust as required.
It also means we cannot afford to be passive about the coming elections. Please ensure you study the plans of all the candidates as regards improving the economy and vote for your preferred candidate. What we cannot afford to do is be indifferent as elections always have consequences.
See you all in August. Do have a wonderful week ahead.