For the naira to maintain a reasonable balance with competing currencies amidst current inflationary surge, renowned economist, Bode Agusto, has advised Nigeria and individuals to avoid net liabilities in hard currencies.
Agusto, who stated this during a webinar organised by Coronation Insurance Plc in partnership with Access Bank Plc, said any currency that had the rate of inflation significantly below Nigeria’s inflation rate was a stronger currency against the naira.
He spoke on the topic,” Key Macroeconomic Risks and How it Impacts Your Business.” Advising that the country or individual should avoid having net liabilities in dollars or any hard currencies, he pointed out that the naira would devalue itself against the currencies and that would mean the need for more and more naira to repay debts. According to him, long term rate of inflation of a dollar is under two per cent, which implies that a dollar loses less than two per cent of its purchasing power every year while the naira loses 12 per cent of its purchasing power every year.
He said that the naira should devalue by that difference in inflation to keep purchasing power parity. According to him, “the Nigerian naira is a weak currency because the rate of inflation of the Nigerian naira is very high. Therefore, we should not owe in hard currencies, that is the hard currencies that have significantly lower rate of inflation like the United States dollars, the United Kingdom pounds, the Euro, the Japanese pounds and so on.
“The first one and the most important one, in my opinion, out of the three, is the inflation, the rate of inflation currently in Nigeria is around 12 per cent but the long term rate is also around that number.
If you take a five year average, a 10-year average, a 15-year average and even a 20-year average is around that number. So this means that the long term rate of inflation in Nigeria is about 12 per cent.
“What is inflation? If you think of inflation, it is the rate at which the naira in your pocket loses purchasing power. For example, if you have a hundred naira in your pocket at the beginning of the year, it can only buy you a 12 per cent less than what it could buy at the beginning of the year. “Therefore, you need to see the link between this and the exchange rate. The principal exchange rate we are talking about is the rate between the Nigerian naira and the US dollar.
Why are we talking about this, because the US dollar is the principal currency of international trade. “What then is the long term rate of inflation of a dollar, long term rate of inflation of a dollar is just under two per cent. It means the dollar loses two per cent of its purchasing power every year while the naira loses 12 per cent of its purchasing power every year.
“What does that tell us? That tells us that the naira should devalue by that difference in inflation to keep purchasing power parity. So that is the principal reason the rate of naira is always devaluing against the dollar and the naira is the weaker of the two currencies.”
The short, medium and long terms inflationary trend in the Nigerian economy, which has been hovering around 13 per cent over a period now, may jeopardize pension investable funds in a long term spanning 20years if the trend is not put under control.
Speaking on erosion of pension assets, he classified the assets as monetary assets, which returns on investment is tied to rate of inflation and the strength of a country’s currency. He said by saving and investing pension assets, the investor should think high return on investment, which will be equal to the inflation rate.
“Managing our monetary assets, particularly our savings and pension assets, it is important for us to try to earn a return at it, at least, equal to the rate of inflation. “But this is going to be extremely difficult in these climes because the risk free rate itself is significantly below the rate of inflation and the fixed income securities are priced using the risk free rate plus risk premium.
“So some strong companies in Nigeria today are borrowing at 6,7 per cent when the true rate should be much higher than that.” He said. He noted that the macroeconomic three key prices in the economy, which will determine investment decision are the rate of inflation, interest rates and exchange rate. He pointed out that inflationary trend in Nigeria had been hovering around over a period of time and that the analogy suggests that it may continue unabated in short, medium and long term spanning 20 years.