Our very own literary genius, Prof Chinua Achebe, shortly before he bade us goodbye, left us with a book that he succinctly and aptly titled, “There was a country.” The motivation for that book must have come from events that continue to shape a country that was once the envy and hope of many, into one where no one wants to live in, or be part of. The fate that has bedevilled the entire country is now circling around our beloved currency, the Naira, so much that if nothing is done, and done fast enough, there may be a book entitled, “There was a currency.”
It all started in 1986, when the IMF confused and compelled the then government of Nigeria to devalue the Naira. That was when the word, “conditionality,” became a household word in Nigeria as the IMF gave the then Nigerian government “conditionalities” for an IMF loan that the generality of the populace opposed. Precisely, on September 26th, 1986, the then Nigerian government, in its hunger for an IMF loan, devalued the Naira to N4 to the US Dollar through what it called “Exchange Rate Liberalization Policy.” That was the day Naira’s journey southward began, and the journey has continued in that direction ever since. Now, it takes about N575 to acquire one US Dollar—a decrease of 14,275%.
Those in authority at Nigeria’s apex bank have been tinkering with the Naira since then with no result. Various currency exchange regimes have been implemented and experimented with, to no avail. Nigeria has become a theater or laboratory for exchange rate experiments of sorts.
Economic and financial historians have it that Nigerian governments have tried to manage the exchange rate with the Foreign Exchange (Monitoring & Miscellaneous Provisions (FEMM) Act 1995, the Two-way Quote System (market making) in the inter-bank FX market in 1996, and the Wholesale Dutch Auction System (WDAS) in 2006. On June 27th, 2016, the CBN launched the Naira-settled OTC FX Futures Market. Unfortunately, it seems that none of those worked as was expected, to say the least.
Having tinkered with the Naira for so long, something should tell the CBN et al., that no amount of tinkering will save the Naira. The solution lies in elementary economics which says that the exchange rate of a currency is dependent on the fundamentals of the economy. So, to get the Naira moving north again, we must start from the basics and strengthen the fundamentals of the economy.
What are the fundamentals of the economy?
According to economics, the major factors that determine the exchange rate are inflation, interest rate, public debt, political stability, economic health (growth and development), balance of trade, and current account deficit, among others. By objectively looking at each of those factors with reference to Nigeria, even a blind man, or a layman can see why the Naira is in the hole.
Look at inflation for example, in the past five years, it has averaged 12%; only recently did it go down to about 11%. It was 15.52% in 2017, 12.09% in 2018 and 11.04% in 2019. Even as human beings, when the blood pressure gets very high and remains so for a long time, other fabrics of the body chemistry begin to break down and apart.
Talking about public debt, Nigeria is over-leveraged, waiting for the day that China will take over due to inability to pay. According to the Debt Management Office, the total public debt of Nigeria as at March 2021 stood at $87.239 billion. One could say that the US has much more debts and their currency is still high. Yes, the US is better than Nigeria in terms of the other factors and the US has various workable means of currency exchange risk management; Nigeria does not.
What about stability, be it political or social? At least, for the last 16 years or so, Nigeria could be said to have been politically stable, although the talks of self-determination by different parts of the country loom large in the minds of investors and analysts. When you talk about stability in all its ramifications, Nigeria is in a very bad shape, with Boko Haram and kidnappers holding the populace ransom. To make the situation worse, bandits and herdsmen have enlisted in the groups that are out to make Nigeria unstable.
How healthy is Nigeria economically? Probably comatose.
The GDP may be growing, but that does not translate to economic health. Unemployment is at about 10% level, infrastructures are as good as nonexistent, (no good roads, no electricity, you name it). The economy is dependent on Oil to the extent that 90.61% of its export come from petroleum-based products, according to the Q2 2021 foreign trade statistics released by the National Bureau of Statistics. Little wonder why, whenever the price of crude sneezes, the Naira catches the flu.
Should I even continue by talking about Nigeria’s balance of trade and current account deficit? According to Statistica.com, in 2020, Nigeria had a trade deficit of $22.07 billion. A trade balance is the difference between the value of what a country exports and what it imports. While a positive trade balance is a trade surplus, the opposite is a deficit. It, therefore, implies that Nigerians imported more goods than they exported to the tune of $22.07 billion. The fact that the Nigerian economy is import-dependent and consumption-oriented makes matters worse. The implication of so much deficit is that the demand for imported goods by Nigerians far outweighs the demand for Nigerian goods, and such high demand for importation puts pressure on the Naira because it has to be exchanged for the dollar needed to consummate import transactions. Such pressure further erodes the value of the Naira vis a vis the Dollar.
I really would not want to continue to belabour you with explanations of the other factors, as by now, you should have got the gist of the matter. The Naira is akin to an object that stands on a four-legged table. If those legs supporting the table are broken or weak, the object will wobble and possibly fall. That is the fate of our dear Naira, the legs of the table (the economy) are broken, so fall the Naira must.
Suffice it to say, therefore, that the Naira’s journey to the south will continue as long as no efforts are made by the Nigerian government and Nigerians to strengthen the fundamentals of the economy, curtail over-dependence on oil, broaden the revenue sources of the country and curtail import dependency. Until then, “Uhuru” is far and we may be in for a requiem for the Naira.
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