What is Quantitative Easing (QE)?

QE is a monetary policy tool used by central banks to increase the money supply in the economy. This is typically achieved by purchasing government bonds or other financial assets from banks and other financial institutions. By injecting new money into the system, the central bank aims to:

• Lower interest rates: Increased money supply makes it cheaper for banks to borrow from the central bank, leading them to offer lower interest rates to businesses and individuals.
• Stimulate economic activity: Lower interest rates encourage borrowing and investment, which can boost economic growth.
• Stabilize financial markets: By purchasing assets, the central bank can help to stabilize prices and prevent asset bubbles from bursting.

QE in Nigeria:

While Nigeria hasn’t explicitly adopted the term “quantitative easing,” the Central Bank of Nigeria (CBN) has engaged in practices that resemble QE in certain instances.

• 2012: The CBN used repurchase agreements (repos) to buy back AMCON (Asset Management Corporation of Nigeria) bonds, injecting liquidity into the banking system and lowering the Broad Money Supply Index (M2) [Economic and Financial Review – Central Bank of Nigeria, 2017].

Current Situation (as of March 1, 2024):

• Inflation: Nigeria is facing high inflation, with the consumer price index (CPI) reaching 21.39% in December 2023 [National Bureau of Statistics, Nigeria].
• Exchange Rate: The Nigerian Naira (NGN) is currently trading at around NGN 500 to the US Dollar (USD) on the official market, with a significant spread existing in the black market [XE Currency Converter].

Potential benefits for Nigerian businesses in the global market:

• Weaker Naira: A weaker Naira can make Nigerian exports cheaper, potentially increasing their competitiveness in the global market.
• Focus on non-oil exports: With a reliance on oil exports facing challenges due to volatile oil prices, Nigerian businesses can explore opportunities in non-oil sectors like agriculture, manufacturing, and services to diversify their export portfolio.

However, it’s crucial to address these 5 concerns before relying solely on a weaker Naira for export competitiveness:

1. Production Cost Inflation: A weaker Naira can make exports cheaper internationally, but if your domestic production costs are heavily reliant on imported materials or equipment, those costs could inflate, potentially negating the price advantage.
2. Quality Control & Standards: Maintaining high-quality production is essential for sustained export success. Ensure your products meet international standards and can compete globally, regardless of price.
3. Logistics & Infrastructure Challenges: Nigeria’s export infrastructure, including transportation and shipping networks, might not be optimized for a significant increase in export volume. Address potential bottlenecks and logistical roadblocks.
4. Global Market Fluctuations: The global market is dynamic. A weaker Naira might benefit you today, but a stronger Naira in competitor countries could quickly shift the advantage. Diversify your export strategy to avoid over-reliance on short-term currency fluctuations.
5. Sustainable Production & Environmental Impact: Focus on sustainable production practices and environmental impact reduction. Eco-conscious consumers are a growing market segment, and ignoring these aspects could limit your export potential.

Remember, a weaker Naira is just one piece of the export puzzle. By addressing these concerns and developing a comprehensive export strategy, you can position your Nigerian business for long-term success in the global marketplace.

Conclusion:

While quantitative easing or similar practices can offer potential benefits for stimulating economic activity and making exports cheaper, it’s important to acknowledge the associated risks like inflation and rising import costs. Nigerian businesses should carefully consider these factors and explore various strategies, including focusing on non-oil exports and improving operational efficiency, to enhance their competitiveness in the global market. In our future articles, we will explore ways  Nigerian businesses and entrepreneurs can take advantage of the weaker Naira to increase global sales of goods and services.