“In an earlier article published, this month (May 2014), this writer explained why further naira devaluation would restrain demand and economic growth, and also deepen the depth of poverty in a population that is heavily riddled with heavy unemployment, in which more Nigerians, now live on less than $2 per day. Furthermore, an unyielding, suffocating, self-inflicted, and unusual burden of surplus Naira was also identified as the primary cause of weaker Naira exchange rates, even when we earned relatively, bountiful dollar reserves, since the return to civil rule in 1999.” The narrative, this week, will answer questions on the impact of a stronger naira exchange rate, such as N80:$1, on critical economic indices like inflation, interest rate, fuel subsidy, national debt and job creation.” The above title “Advantages of a Stronger Naira” was first published on May 26 2014, in at least 3 popular Nigerian Newspapers including this one. The discussion is as follows: “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 the curve of Naira depreciation from stronger than N1=$1 in the 70s and early 80s to the current market rate of about N160:$1. In practice, a much stronger naira should realistically, 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 the 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 total stock of naira by N160bn; furthermore, if CBN’s subsisting mandatory Cash Reserve Ratio is also, for example, 10 per cent, commercial banks’ could further leverage ten-fold on this fresh addition of N160bn to seriously compound the burden of surplus naira and spiralling inflation in the economy. Conversely, if the same $1bn allocation was exchanged by CBN at a stronger rate of say, N80:$1, the addition to money supply, from such substituted naira allocation would obviously reduce nominally, by at least 50 per cent to just N80bn. Invariably, inflation will fall when there is less Naira liquidity and a stronger naira rate, as there would be less additional surplus cash created from Naira substitution to expand demand and buy up more goods and services; Furthermore, lower inflation rates will, also, increase the purchasing power of all income earners, and reduce cost of production. Indeed, economic best practice inflation rate is often less than 2 per cent in successful economies everywhere; thus, our current inflation rate of 8 per cent (2014) means that static income earners (e.g. pensioners) will lose 40 per cent 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, www.betternaijanow.com), this writer explained that the existing high interest rates are caused by CBN’s self-infliction of surplus naira on the economy, particularly, whenever it independently substitutes Naira allocations for dollar-denominated revenue. Furthermore, lower naira exchange rates will also evolve, whenever this ‘poison’ of Systemic Naira surplus increases; conversely, a stronger exchange rate of, say, N80:$1 will invariably reduce the challenge of disenabling excess naira by at least 50 per cent, and therefore, also restrain inflation. Consequently, with a stronger Naira, CBN will never be compelled, by the fear of inflation, which is fueled by subsisting surplus naira, to knowingly sustain disruptively high Monetary Policy Rates (MPR) that will, in turn, trigger over 20 per cent cost of borrowing to real sector investors. Thus, when there is much reduced or near-optimal money supply, the apex bank will invariably lower its MPR (i.e. rate at which it lends to commercial banks), from the current, disturbingly high level of 12 per cent, to more benign levels, below 5 per cent, so that banks can, in turn, lend to investors at rates that facilitate increasing productivity and more job opportunities. Notably, cost of funds to the real sector never exceeds single digit in prosperous economies. Evidently, if cost of borrowing is cheaper, Made-in-Nigeria goods will also become more competitive against those imports, which are also supported with cheap concessionary funds by home governments. Ultimately, 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, paying double-digit interest rates, to the same banks, in order to remove perceived surplus naira values from the system, and restrain inflation. The irony is that the CBN is actually the direct cause of the eternally surplus Naira. Will a naira exchange rate of N80:$1 has 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 the 100 per cent higher purchasing power of Naira incomes would also encourage local entrepreneurs to produce, particularly if cost of borrowing also falls below 10 per cent. 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, which will further invigorate the industrial climate, to instigate rapid industrial expansion, with even more job opportunities and government tax revenue in tow. Will a stronger naira eliminate fuel subsidy? Yes, it would; for example, if petrol, as a commodity, sells for $1/litre ex refinery worldwide, this would be equivalent to N160/litre in Nigeria, without shipping and other extraneous local charges and taxes. 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. Notably, however, 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 exchanges for N160:$1. Nonetheless, 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, if there is 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 then 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 debt, 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 (or subsidizing) banks at zero per cent, 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, therefore, the distortions associated with persistent excess naira liquidity will be harmoniously resolved if dollar certificates are adopted for the allocation of dollar-denominated revenue.” Post-script 2018: Exchange rate N300-360 per dollar, inflation nearer 15 per cent from 8 per cent, youth unemployment well over 20 per cent while over 40 per cent revenue is used for debt servicing. Hope for the future is very big! SAVE THE NAIRA, SAVE NIGERIANS!