Nigeria’s Currency Crisis And What South Africa Can Learn From It
Nigeria’s currency problem becomes obvious once this is understood: the demand for the Naira is extremely low, while the demand for the dollar is extremely high.
Many Nigerians have been told that “speculators” are the reason the Naira keeps collapsing. This narrative is repeated often, especially by the Central Bank, but it falls apart the moment you examine what speculation means.
Currency speculation simply refers to buying and selling currencies to profit from changes in their value. This definition alone reveals something important: speculation is a reaction to currency fluctuations, not a cause of it. Speculators only bet against a currency when they believe its value will fall. If the currency were stable, there would be no profit opportunity, and no reason to speculate at all. In other words, speculation is an effect, not the cause.
This leaves us with the real question: why does the Naira keep falling, creating the perfect environment for speculation in the first place?
Exchange rates are prices like any other
To understand this, we need to revisit a simple economic truth. The exchange rate is just a price – the price at which one currency is traded for another. Like all prices, it is determined by demand and supply. When there is high demand for dollars (meaning, many people are using Naira to buy dollars), the dollar strengthens. When there is high demand for Naira, the Naira strengthens.
This is why importation weakens the Naira: importing means demanding dollars to buy foreign goods. Exportation strengthens the Naira, because foreigners bring in dollars to buy Nigerian goods, increasing the demand for Naira.
Nigeria’s currency problem becomes obvious once this is understood: the demand for the Naira is extremely low, while the demand for the dollar is extremely high.
Low production means low demand for the Naira
The reason the Naira has little demand is simple: Nigeria produces very little. When a country is not producing goods and services, two consequences follow.
First, domestic demand for the local currency falls. When you buy Akara with Naira, you are using money to buy goods – but from the seller’s perspective, she is using her Akara to “buy” your Naira. Production creates demand for currency. When fewer goods are produced, fewer people demand Naira, and as its demand falls, so does its value, i.e., rising prices.
Second, foreign demand tumbles. Exporters usually receive payment in dollars or other foreign currencies, but they exchange these foreign currencies for Naira to operate locally. If Nigeria produces very little, foreigners have no reason to bring their currency into the country, and exporters have little reason to exchange foreign currency for Naira. The result is predictable: very low demand for the Naira.
When the demand for something is low, its value falls. The Naira’s decline follows this basic principle.
Low production isn’t the main culprit – monetary inflation is
While low productivity weakens the Naira, an even larger factor drives Nigeria’s currency crisis: the massive monetary inflation, i.e., an increase in the supply of Naira.
The law of demand and supply is clear: when the supply of a commodity increases, its price falls. The reason pure water is cheap is because it is everywhere; in the desert, that same sachet could sell for ₦500 because supply is scarce. Increase the supply and value drops. Reduce the supply, and value rises.
The Naira works the same way. When the supply of Naira increases, its value falls. Nigeria has experienced a huge surge in money supply, which has flooded the economy with Naira. This increases the demand for goods, services, and dollars – all at once. More Naira chasing the same amount of goods pushes prices up, and more Naira chasing dollars and other currencies pushes the exchange rate up. What we call “Naira depreciation” is simply too much Naira in circulation.
To illustrate: even with low productivity, if the money supply were suddenly cut in half, the prices of goods would drop, and the Naira would strengthen dramatically against the dollar. This is not suggested policy, because cutting the money supply can have severe consequences; it simply illustrates the relationship between supply and value.
An explosion in the money supply
The fall of the Naira in recent years becomes even clearer when looking at how rapidly the money supply has grown.
Under President Buhari, the money supply increased by ₦22.7 trillion over 8 years – an average of ₦2.8 trillion per year. Under President Tinubu, the money supply has already increased by over ₦7 trillion in less than one year, more than triple Buhari’s annual rate.
Flooding the economy with Naira inevitably destroys its value. Speculators are not the cause of the problem; they are simply reacting rationally to a currency that the government itself has weakened.
The solution is easy
Low productivity and money supply increases are the real problem; the Nigerian government should remove the obstacles to productivity like high taxes and overregulation, and watch a boom in productivity, which will undoubtedly result in an increased Naira demand, causing its value to rise and resulting in lower prices
This should be done while the money supply stops growing. The Mises-Hayek Theory of the Business Cycle very clearly explains that in increase in the money supply leads to recessions – i.e., a fall in productivity, so halting money growth isn’t just a way to remove a hindrance to productivity, it also ensures that prices not only stop rising, but eventually start to fall, leading to higher living standards.
The lesson for South Africa
South Africa, and every country on earth, can learn from this simple lesson to not point the fingers at the wrong culprit, but to turn its focus towards the real one. Should Nigeria, SA, and any other country adopt this solution, we might have a shot at ending world poverty.
Econ Bro (@EconBreau and @EconBreau2 on Twitter/X) is a Nigerian Austrolibertarian economist and an apprentice at the Mises Institute. Under the organisation name “The Freedom Institute” he teaches individual liberty, personal responsibility, private property rights, free markets, and sound money to mostly young people across Nigeria. Econ Bro is an Associate of the Free Market Foundation.
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