Exchange Rate Uncertainty Principle

 

Heisenberg Uncertainty Principal” states that we can know either where a quantum particle is or how fast it’s moving, but it’s impossible to know both at the same time

I came across this quote, and what immediately came to mind is the exchange rate of the Naira that seems to be a perpetual moving target. A pendulum undulating like a serpentine labyrinth.

Clearly, with the Nigerian situation, we can know whether the Naira exchange rate is falling or rising at any point in time, but NOT its specific value in any planning period… say, within a month.

Can anybody predict to a 10% margin of error what the Naira would exchange for to the dollar in the next one month?

It is doubtful if the CBN Governor himself can do this!

It is tough for an importer (or any other businessman) to plan because the more you seek to pin down the exact exchange rate of the Naira, the more befuddled you become.

A situation in which what you pay at the ports can vary by as much as 200℅ without prior notice, within a space of the weeks, makes it suicidal to go into exporting… unless you have a really fat profit margin indeed. With the eroded purchasing power of most citizens, you could easily end up with an overflowing warehouse of unsold goods predicated on bank loans whose interest is calculated daily.

That would be the perfect prescription for HBP!.

It does not take an economist to realize that an economy benefits immensely from a weak currency if it is an export oriented one. Conversely, an import oriented country like Nigeria suffers when the currency is weak.

recession

A country like China that is immensely export oriented worries when its currency is becoming too strong and is known to deliberately implement policies that would make its currency weak so that it’s products are not too expensive when exported.

Different countries, different strokes, you would say!

In the light of the above amateurish economic analyses, to save Nigerians from spending their productive time watching the movement of the Naira against the dollar and other major international currencies, with their hearts in their mouths, all we need to focus on is become a less import oriented country, or be a more export oriented one.

Chikenah?

When can we imbibe this into our national psyche? Yesterday! Or, more realistically, TODAY.

I once mentioned this simple platitude in a forum, and I was roundly castigated for egregious naivety in proffering a simple solution to a much more complex Nigerian economic problem!

Keep It Simple Stupid ( K.I.S.S)

Oil has been our greatest income earner as a country. Oil is progressively losing its importance globally. Prices are lower than we had in years past . Nigeria therefore needs to focus on areas of comparative advantage, mostly agriculture.

photo courtesy - vanguargngr.com

photo courtesy – vanguargngr.com

It is heart warming the recent news that Nigeria recently earned about 70% of its income from non oil, proceeds, during a particular fiscal period. Let us hope this is sustained.

Focus on producing what is needed outside the shores of the country and encourage the export of those commodities aggressively. That would shore up the value of the Naira because we would be earning foreign exchange. This cannot happen overnight, but inexorable baby steps on the right direction eventually gets you to the Promised Land.

On the flip side, reduce / discourage / perpetually ban the importation of products, that have substitutes here in Nigeria.

Why import rice and beans and toothpick and wine into the country? What about Nigerians truly taking agriculture seriously, and leave the NDA to drink its oil? What is wrong in encouraging and exporting alternative medicine products, which are often quite effective, for export?

On a personal level, you can improve your bottomline by spending less or earning more. Similarly, nationally, we could curb our love for imported goods (spending less) or encourage exports in areas we have strengths as a nation (earning more).

By so doing, the maddening noise and focus on the exchange rate of the Naira would go down. It would eventually simply become a non issue.

It is intellectually dishonest for educated Nigerians to keep wailing about the abysmal value of the Naira when we are not earning more but insist on spending more (rather than spending less) on foreign goods.

Yes; Nigerians need to tailor their appetites according to the size of their mouths! Like my mentor would always say, live within your means, first, then expand your means.

Basic economics, but are we practicalizing this basic principle at both individual and national levels?

 

1 comment for “Exchange Rate Uncertainty Principle

  1. WillyWest
    September 15, 2016 at 11:05 am

    “A country like China that is immensely export oriented worries when its currency is becoming too strong and is known to deliberately implement policies that would make its currency weak so that it’s products are not too expensive when exported.”

    I just love the above explanation, best way to explain why Korea and Japan with low value currencies compared to the Naira are living just as fine as the Americans.

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