The Naira and Nigeria’s Export Competitiveness: Is Devaluation A Myth ?

To Produce For Exports, Nigeria Requires a Lot More than Currency Devaluation

Nigeria’s Naira and Export Competitiveness

Yemi Cardoso, Governor of the Central Bank of Nigeria, has emphasised that the devaluation of the naira presents an opportunity to boost Nigeria’s exports. He was speaking after the 30th Nigerian Economic Summit during which the Chief Economist of the World Bank, Indermit Gill, pointed out that the naira had become “most competitive in 20 years” and that this offers the private sector a “great opportunity” for the private sector to boost exports.

While currency devaluation can indeed make exports more competitive, the experience of countries like Argentina and others in Latin America highlights that devaluation alone is not sufficient to boost exports.

For currency devaluation to deliver long-term economic benefits, it must be part of a broader strategy that includes fiscal discipline, inflation control, economic diversification, and consistent policymaking. Without these, the benefits of devaluation are likely to be short-lived, and the country could fall into a cycle of debt, instability, and stagnation.

Currency Devaluation: The Case of Argentina

Argentina offers a compelling example of how currency devaluation can temporarily boost exports but fails to create long-term economic stability without deeper structural reforms. In the early 2000s, Argentina abandoned its fixed exchange rate, allowing the peso to depreciate significantly. This devaluation, combined with Argentina’s strong agricultural sector, initially boosted the country’s export competitiveness, especially in commodities like soybeans, wheat, and beef.

Export Boom: Argentina’s agricultural exports flourished as the weakened peso made its products cheaper in global markets. Soybeans and related products, like soybean oil and meal, were particularly successful in penetrating international markets, contributing heavily to foreign exchange inflows.

However, despite this short-term export boom, Argentina’s experience with currency devaluation was ultimately limited by deeper economic problems. Chronic inflation, high fiscal deficits, and an over-reliance on a narrow range of exports, mostly agricultural, meant that the country could not sustain the gains from devaluation.

The lack of export diversification left Argentina vulnerable to fluctuations in global commodity prices. As a result, any gains from a weaker currency were quickly eroded by domestic economic instability.

Failure to Diversify: Argentina’s failure to diversify its export base beyond agriculture proved to be a significant limitation. With manufacturing contributing less than 15% of total exports and limited industrial competitiveness, Argentina’s economy remained exposed to the volatility of global commodity markets. As the price of key agricultural exports dropped, so did the country’s foreign earnings, exacerbating fiscal and currency crises.

For countries like Nigeria, Argentina’s experience underscores the importance of comprehensive economic reforms. A weakened currency may improve export competitiveness in the short term, but without fiscal discipline, inflation control, and economic diversification, these gains will not be sustainable.

Comparison of Nigeria’s and Argentina’s Export Base

While Argentina’s challenges are instructive, Nigeria faces even greater barriers in converting currency devaluation into export growth due to the structure of its economy. Nigeria’s export base is far less diversified than Argentina’s, with the overwhelming majority of its export revenues coming from oil, and its non-oil sectors, particularly agriculture and manufacturing, contributing very little to export earnings. (Nigeria economy or production base is sufficiently diversified but the broad range of products that are locally manufactured suffer from a mix of low quality and high production cost, limiting the export potential.) Strong institutional reforms and prudent economic management is required for currency devaluation to boost export significantly.

 

  1. Heavy Reliance on Oil Exports

Nigeria’s Export Base: Over 90% of Nigeria’s foreign exchange earnings come from crude oil and natural gas exports. While Argentina’s reliance on agricultural exports presents vulnerabilities, Nigeria’s dependence on a single commodity—crude oil—makes it even more exposed to external shocks. Oil price volatility directly affects Nigeria’s fiscal stability and foreign exchange reserves. When global oil prices drop, as seen in 2014-2016, Nigeria’s economy contracts sharply, highlighting the risks of relying on oil.

Unlike Argentina, whose agricultural exports provide some diversification, Nigeria’s non-oil exports, including agriculture and manufacturing, remain minimal. In fact, agriculture contributes less than 10% to Nigeria’s total exports, which is disproportionately low for a country with vast arable land and agricultural potential.

  1. Weak Agricultural Export Capacity

Argentina’s Agricultural Strength: Argentina’s export competitiveness is largely driven by its highly productive agricultural sector, which benefits from fertile lands, advanced farming techniques, and robust supply chains. Argentina is one of the world’s largest exporters of soybeans, beef, and other agricultural products. This gives it a reliable source of export income even during periods of currency volatility.

Nigeria’s Agricultural Weakness: In contrast, Nigeria’s agricultural sector, while employing a large portion of the population, is underdeveloped and inefficient. Nigeria has the potential to export products such as cocoa, sesame seeds, and palm oil, but the sector remains largely untapped. A lack of access to modern farming technology, poor irrigation, limited use of fertilizers, and fragmented land ownership systems hinder productivity. As a result, Nigeria exports very little agricultural produce compared to its potential, further constraining its ability to diversify export earnings.

  1. Infrastructure Deficits

Infrastructure in Argentina: While Argentina has faced its own infrastructure challenges, particularly in transport and logistics, its agricultural export infrastructure—such as silos, ports, and railways—remains relatively developed. This allows the country to efficiently move large quantities of agricultural goods to global markets.

Nigeria’s Infrastructure Deficits: Nigeria’s poor infrastructure, particularly in transportation and power, severely limits its ability to expand exports. The country’s road networks are underdeveloped, making it difficult and costly to transport agricultural products from rural areas to export hubs. Ports are congested and inefficient, causing delays and increasing the cost of trade. Furthermore, the unreliable power supply adds to production costs for manufacturers, making it difficult for Nigeria’s industrial goods to compete in global markets.

Without significant investments in infrastructure, particularly in transportation and logistics, Nigeria’s agriculture and manufacturing sectors will struggle to scale up production and meet international demand. The lack of supportive infrastructure further weakens Nigeria’s capacity to convert devaluation into meaningful export growth.

  1. Limited Manufacturing Base

Argentina’s Manufacturing: While not as advanced as many emerging markets, Argentina has a moderate manufacturing base, with exports in automotive parts, machinery, and food processing. This diversification allows Argentina to rely on both agricultural and industrial exports, though the latter remains relatively small compared to other middle-income countries.

Nigeria’s Manufacturing Gaps: Nigeria’s manufacturing sector is even less developed. Most of its domestic manufacturing is oriented toward the local market, with very little capacity to export. Poor infrastructure, high production costs, and a lack of industrial policies that promote export-oriented industries have kept Nigeria’s manufacturing sector stagnant. As a result, Nigeria has not developed competitive industries in sectors such as textiles, electronics, or automobiles, which other countries have used to diversify their export bases.

This lack of industrial exports makes Nigeria highly vulnerable to external shocks in global oil prices. While Argentina can at least fall back on agriculture and limited industrial goods, Nigeria’s narrow export base exacerbates the impact of oil price volatility on its economy.

Challenges to Nigeria Converting Devaluation into Export Growth

Given these structural challenges, Nigeria faces significant barriers in converting currency devaluation into sustainable export growth. While a weaker naira can make Nigerian goods cheaper on the global market, the country’s underdeveloped non-oil sectors, lack of diversification, and weak infrastructure make it difficult to capitalize on this advantage.

  1. Over-Reliance on Oil: Nigeria’s dependence on oil exports means that any potential gains from a weakened currency are constrained by global oil prices. Even if Nigerian oil becomes more competitively priced, a lack of diversification leaves the economy highly vulnerable to oil price fluctuations. Unlike Argentina, which at least benefits from agricultural diversification, Nigeria’s narrow export base makes it harder to generate stable export growth.
  2. Low Agricultural Productivity: While Argentina’s agricultural sector has the capacity to respond quickly to currency devaluation by increasing exports, Nigeria’s agriculture remains constrained by low productivity. Without improvements in farming practices, technology, and infrastructure, Nigeria’s ability to scale up agricultural exports in response to a weaker naira will remain limited.
  3. Infrastructure Deficits: Nigeria’s poor infrastructure, particularly in transportation and power, severely limits the country’s capacity to boost agricultural and industrial exports. Without addressing these infrastructure challenges, even the most competitive Nigerian goods will struggle to reach global markets in a cost-effective manner.
  4. Weak Manufacturing: Argentina’s modest industrial sector allows it to generate some export revenues from manufacturing, but Nigeria’s manufacturing sector remains too small and uncompetitive to contribute significantly to export growth. Without focused industrial policies, investments in technology, and improvements in the business environment, Nigeria’s manufacturing base is unlikely to play a major role in export diversification.

 

Brazil’s Export Growth Following Currency Devaluation

Brazil provides another instructive example of how devaluation can boost exports, but only when accompanied by the right policies. In 1999, Brazil abandoned its fixed exchange rate for the real (BRL), resulting in a significant devaluation. This move came in response to economic crises, including high inflation and external debt pressures.

Impact on Industrial Exports: The devaluation of the real made Brazilian industrial goods, particularly in sectors like automotive and manufacturing, more competitive in international markets. Brazil’s automobile industry, for example, expanded its export base, particularly within Latin America and Africa, as Brazilian cars became more affordable for foreign buyers.

However, Brazil’s success was not just due to devaluation. The country implemented broader economic reforms, including fiscal consolidation, to control inflation and manage public debt. Brazil’s ability to diversify its export base, incorporating both agricultural and industrial goods, helped stabilize its economy and avoid the pitfalls experienced by Argentina.

For Nigeria, Brazil’s experience highlights the need to look beyond short-term competitiveness gains from devaluation. Brazil’s reforms helped ensure that the benefits of a weaker currency were not offset by runaway inflation or fiscal imbalances, offering a critical lesson on the importance of policy coherence and diversification.

Chile’s Success with Export Diversification Post-Devaluation

Chile’s experience in the 1980s and 1990s is another case that demonstrates the importance of coupling currency devaluation with structural reforms. Faced with economic instability and high inflation, Chile allowed its currency, the peso, to float, leading to periodic devaluations.

Export Diversification: Chile’s success was rooted in its ability to diversify its export base beyond copper, its primary export. The country expanded into agriculture, particularly wine and fruit, which helped Chile take advantage of its devalued currency. Importantly, this diversification reduced Chile’s vulnerability to price swings in any one commodity.

Structural Reforms: Chile’s approach went beyond devaluation. The government implemented sweeping economic reforms, including trade liberalization, investment in infrastructure, and fiscal discipline. These reforms allowed Chile to integrate more effectively into global markets, sustain export growth, and build resilience against external shocks.

For Nigeria, the lesson from Chile is clear: devaluation must be paired with efforts to diversify the economy and reduce reliance on a single export commodity, such as oil. Without such reforms, devaluation alone will not provide long-term benefits.

Rapid Export Expansion in East Asia: The Case of South Korea

South Korea’s rapid export growth, particularly from the 1960s to the 1990s, illustrates the potential for currency devaluation to stimulate long-term economic development—provided it is supported by sound fiscal and monetary policies.

Currency Devaluation and Export-Led Growth: Like Argentina and Brazil, South Korea maintained a weak currency, the won, to make its exports, especially in textiles and electronics, more competitive in international markets. This strategy helped South Korea penetrate global markets, particularly the U.S. and Europe, where demand for its goods grew exponentially.

The Role of Fiscal and Monetary Policies: South Korea’s success was largely due to the government’s proactive fiscal policies, which included significant public investment in infrastructure and subsidies for key industries like shipbuilding, steel, and automobiles. The Bank of Korea kept interest rates low to encourage investment in capital goods, allowing manufacturers to modernize and increase efficiency.

Result: This combination of devaluation and government support helped South Korea transform from a low-income, agriculture-based economy into a global industrial powerhouse. The lesson for Nigeria is that a competitive currency must be backed by targeted public investments and a clear industrial strategy. Without this, the gains from devaluation may not translate into sustained economic growth.

Challenges and Pitfalls: Lessons from Venezuela

Venezuela offers a cautionary tale about the dangers of relying on devaluation without the right accompanying policies. Like Nigeria, Venezuela is highly dependent on oil exports. The country has repeatedly devalued its currency, the bolivar, in an attempt to boost exports, but without success.

Hyperinflation and Economic Mismanagement: Venezuela’s failure stems from hyperinflation, poor fiscal management, and an over-reliance on a single export (oil). The lack of diversification and poor governance meant that devaluation only worsened Venezuela’s economic crisis, leading to widespread poverty and social unrest.

For Nigeria, Venezuela’s experience highlights the risks of failing to control inflation and implement broad economic reforms. If Nigeria does not diversify its economy and manage inflation carefully, the benefits of a weaker naira could quickly be wiped out.

Opportunities and Strategic Considerations for Nigeria

Drawing lessons from Latin America and East Asia, Nigeria’s weakened naira offers an opportunity to improve its export competitiveness. However, as seen in the case of Argentina, devaluation alone is not enough. The experiences of Brazil, Chile, and South Korea show that devaluation must be accompanied by sound economic policies, including fiscal discipline, inflation control, infrastructure investment, and export diversification.

  • Agriculture: Like Argentina, Nigeria can capitalize on its agricultural potential, but it must ensure that inflation does not erode the benefits of currency devaluation. Investments in agricultural technology and export infrastructure will be crucial to sustain growth.
  • Manufacturing: Brazil’s experience highlights the importance of diversifying exports beyond agriculture. Nigeria could invest in developing a competitive manufacturing sector, supported by low-interest financing and tax incentives.
  • Infrastructure and Reforms: Chile’s success underscores the importance of structural reforms and investment in infrastructure. Nigeria’s roads, ports, and power supply require significant upgrades to ensure that the country’s goods can compete in global markets.
  • Export-Led Industrialization: South Korea’s model shows the importance of an industrial policy that targets key sectors for growth. Nigeria could benefit from similar strategies, fostering export-oriented industries while maintaining a competitive exchange rate.

While devaluation can improve export competitiveness in the short run, sustainable growth requires comprehensive structural reforms, including fiscal discipline, economic diversification, inflation control, and consistent economic policies that build investor confidence. Without these, the benefits of devaluation are likely to be short-lived, and the country may find itself in a cycle of debt and instability, much like Argentina.

 

Share this article

Receive the latest news

Subscribe To Our Newsletter

Get notified about new articles