Should you save in dollars?

With the dwindling fortunes of the naira in the parallel forex market, some folks have started to keep their savings in dollars as a perceived better store of value. This practice did not start recently.

In seminars, I am often asked if it is not smarter to convert your investment or savings to dollars since the naira keeps losing value at a faster rate, hence rather than become richer, you become poorer as the naira loses value against the dollar, and pounds – in essence, become poorer in dollar terms. This is a valid point. As a principle, I don’t offer financial advice. I only teach and equip you to make your own decisions.

However, the issue of naira versus dollars is more than making quick money, our values and sense of patriotism and common good come into play. There are some people that will cheat their parents to make a handsome profit and there are those that find it morally reprehensible. Where to strike the balance is an individual decision and it is unfair to judge others by our principles.

There is no running away from the fact that the dollar is currently a better store of value compared to the naira. Most of our income today comes from oil, whose price has been tumbling in the world market since June 2014. On top of that, we have developed a taste for foreign goods and services, preferring them to local alternatives hence putting pressure on our foreign reserves. It takes common sense to know that this model is not sustainable and something will soon give way – either we run down our reserves or cut down on imports by using local alternatives. I had a recent experience whereby the small generator I use during the day started losing power due to overuse. In summary, it could no longer carry the load it used to carry. To continue using that generator, I have to switch some things off. I had to decide what to switch off between the fridge and the chest freezer. There are no two ways about it, sentiments or no sentiments.

Changing your naira to dollars to hedge against inflation seems like a quick win. You can actually make money doing that, as the naira keeps tumbling. The underlying assumption is that the naira will always fall hence you will always win. Is that really true?

The exchange rate situation can and will change

The demand for the naira will not last forever. A lot of factors will come into play on the demand side. First, many who cannot afford foreign imports will shift to local alternatives. This includes schooling abroad, seeking medical care abroad, importation of finished petroleum products (Dangote refinery and others will come on stream in a couple of years, etc.), homegrown software, etc., food items, etc. That is on the demand side.

On the supply side, there are some Nigerians who see this challenge as an opportunity to export goods and services abroad and earn dollars. Many are already doing this online through the internet. There are companies that earn dollars and pay their employees in naira. With the current exchange rate, this is a good incentive to increase dollar income. As the volume grows over time, the demand pressure for dollars will gradually ease and non-oil exports grow. Again, oil prices will not remain at this level forever. At some point, the naira will start to gain. The naira will not always fall. When it starts gaining, you lose. You not only lose money but the time you would have used to invest in a productive venture rather than speculate in currency.

You still spend naira

If you are living in Nigeria, you still spend naira. You need cash flow from other sources, and this will have to be in naira if you are spending it locally. You have no control over the fluctuations in the forex market. If you buy dollars and then have a need when the naira has become stronger, you lose (buy high, sell low). For you to get a better result in any investment, you need to have control over when you enter and when you exit. If you are forced to exit because of a financial need, you lose control.

If you want to go this way, you are better off with the money you will not need for a while. Also, note that this is a speculative ‘investment’ and hence cannot be considered as a part of your financial security plan. You still need another source of stable income outside of your primary income. Don’t assume you will always win. You can lose.

You are killing the naira

This is the biggest challenge I have with this method of ‘investing’ and the main reason I don’t dabble in it. By hoarding dollars, you are creating artificial scarcity, denying those that really need it and further aggravating the situation. The interesting thing is that you live here. A falling naira affects you also. You are effectively bringing down the roof on your own head also. If everyone changes their naira to dollars, the naira will gradually turn to toilet paper, which impoverishes us all. In essence, we are collectively shooting ourselves in the foot.

When the naira falls, we become poorer as the same naira buys less and less. Workers get a pay cut each time the naira falls, leading to an increase in the prices of goods and services, including those that are not imported. The market woman selling tomatoes also increases her prices because the dollar is higher – her naira is worth less, so she wants more. We raise prices on ourselves by bashing the naira by hoarding the dollars. Even when you make more money (which is in naira), it is worth less. Of what use is a wheelbarrow load of naira that is not worth much? It is a collective enlightened self-interest to have a strong naira.

I doff my hat to Senator Ben Murray-Bruce for his common sense campaign. He not only raises awareness through media campaigns but also has put his money where his mouth is. It is really a wake-up call for us to change habits that got us into this mess and cultivate ones that will get us out of this mess on the path to true greatness as a nation. We cannot become great through the consumption of foreign goods and killing our local industry. The pigeons will always come home to roost.

The decision to change the naira into dollars is yours, but you can earn dollars and keep your naira if you are willing to learn how to earn as much as you can instead of being limited by how much naira you have. That way, you win and we all win.

PS: Naira has appreciated from 400 to 1 dollar to 300 to 1 dollar since I wrote this article. The fluctuation continues. You don’t always win