In most developing economies, exchange rate fluctuations are the primary driver of inflation. Unlike developed economies, where inflation is mostly influenced by money supply and interest rates, our reality is different. The cost of goods and services in Nigeria is heavily impacted by the exchange rate. When the naira weakens, the cost of imports rises, leading to higher prices across the board.
But here’s the thing—before tackling the exchange rate, certain fundamental issues must be addressed. The exchange rate isn’t just a number government can tweak at will, it is influenced by critical economic factors. Trade balance (Are we exporting enough to cover our imports?), Foreign reserves (Do we have enough dollars to support the naira?), Investor confidence (Are investors now willing to bring in foreign exchange or just taking advantage?)
Before the Central Bank (CBN) jumps into exchange rate intervention, these issues must be resolved. If the fundamentals remain weak, all attempt to control the exchange rate will only provide temporary relief—and that’s dangerous. Macroeconomic stability is a prerequisite for a sustainable exchange rate.
To truly strengthen the naira, we must focus on Increasing local production to reduce dependence on imports(not just oil for long term growth, improving the balance of trade by exporting more than we import, strengthening our foreign reserves and restore investor confidence to encourage inflows
Otherwise… Na Gobe!
If we ignore these realities and rush to control the exchange rate without fixing the fundamentals, we will find ourselves in deeper economic trouble. Exchange rate intervention without real economic stability is like building a house on sand—it will collapse sooner or later.
What is sustainable requires fixing these issues first. Once those are in place, we can then manage the exchange rate effectively. Anything else, again “Na gobe” be that!
Akintunde Odeyemi, an investment banker writes from Lagos
