Since Nigeria’s independence in October 1960, her monetary authorities has pursued vigorously the objectives of internal and external balance in a desperate bid to raise the standard of living, alleviate poverty and acquire economic and political power, stability and prestige. They did this by administratively adjusting the foreign exchange rate of the domestic currency Vis-a Vis the peculiar and prevailing economic situations. After all of government’s effort put in place to stabilize the exchange rate, why is there still a fluctuation in the rate and does it affect economic growth?
As it is observed, Nigerian naira’s relationship with the US dollar (and other foreign currencies) has been erratic, unpredictable, violent and full of heartbreak and tears. The built-in dysfunction has also made a lot of people very rich, hence exchange rates and its constant movement becomes great importance to the general public because one way or the other its fluctuation has an effect on the competence of the economy to attain optimal productive capacity. This is alarming given its macro-economic importance specifically in a high import dependent country like Nigeria (Olisadebe, 1991).The Exchange rate reflects the ratio at which one currency can be exchange with another currency, namely the ratio of currency prices
This piece seeks to trace the history of how Nigeria’s foreign exchange management became what it is to the point where the exchange rate of the naira has become a deeply political matter, from 80 Kobo to 1 US Dollar in 1980 to 450 today.
The plunge in oil prices is piling pressure on Nigeria to devalue the naira as dwindling export revenue depletes foreign-exchange reserves, curbing the central bank’s ability to support the currency. Brent crude prices have plummeted about 45% this year to around $36 a barrel.
In today’s Nigeria, our only net export is the crude oil and the fall or rise of this product in the international market determines to a great extent the exchange rate of our naira against other currencies. Nigeria has become number one importer of the world products, made in Nigeria is no longer in voke unlike when naira was still valuable Nigeria was producing and exporting lots of commodities abroad.
In the 1980s we were a net exporter of refined petroleum products. Today we import all our refined petroleum products. We rode in locally assembled cars, buses and trucks. Peugeot cars in Kaduna and Volkswagen cars in Lagos.
Leyland in Ibadan and ANAMCO in Enugu produced our buses and trucks.
Steyr at Bauchi producing our Agricultural tractors, not just Assembly, we were producing many of the components, Vono products in Lagos producing the seats, Exide in Ibadan producing the batteries, not just for Nigeria but for the entire West Africa, Isoglass and TSG in Ibadan producing the windshields, Ferodo in Ibadan producing the brake pads and discs
Tyres produced by Dunlop in Lagos and Mitchelin in Portharcourt from rubber plantations located in Rivers State.
Nigerians were listening to Radio and watching television sets assembled in Ibadan by Sanyo, using refrigerators, freezers and Airconditioners produced by Thermocool, wearing clothes produced from the UNTL textile mills in Kaduna and Chellarams in Lagos. Not from imported cotton as it is today but from cotton grown in Nigeria.
Our water was running through pipes produced by Kwalipipe in Kano, Our toilets were fitted with WC produced at Kano and Abeokuta, cooked with LPG gas stored inside gas cylinders produced at the NGC factory in Ibadan and our electricity flowing through cables produced by the Nigerian wire and Cable, Ibadan and Kablemetal in Lagos and Portharcourt. We had Bata and Lennards producing the shoes we were putting on
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Not from imported leather but from locally tanned leather at Kano & Kaduna. We mainly flying our airways, the Nigeria Airways, to most places in the world. The Airways was about the biggest in Africa at that time. Most of the food we ate were being grown or produced in Nigeria. We were producing all of the above and more in 1980
Today, all those companies have fold up and we import almost everything and these has been the reasons for the economic setbacks we are experiencing now.
However, starting in late 2003, oil prices began to rise steadily from around $30 per barrel till they peaked at $140 per barrel in the middle of 2008. It was also during this period of rising oil prices that Nigeria obtained its $18 billion debt relief from the Paris Club. It was like being in heaven.
First of all, rising oil prices allowed Nigeria’s foreign reserves to increase substantially. There were reserves and there was also the Excess Crude Account (ECA) which had more than $20 billion at one point in 2008.
What these happy events allowed governor Soludo do was to harmonise the four different exchange rates at the time — CBN, Interbank, Bureau de Change and wire rates. He did this by liberalising the foreign exchange manual and including all sorts of things that were previously not accepted as valid for foreign exchange requests. For example, previously you could only obtain foreign exchange to bring in ‘raw materials’. But in the world we now live in, manufacturing has changed to the point where you might need to import some finished products to add to your own process. His liberalisation recognised this.
This was the period when the naira gained about 20% against the dollar without anyone explicitly trying to ‘strengthen’ it
He also made things like medical bills and even credit card bills allowable. And he achieved his aim. In a short while, the different rates converged to within one naira of each other given that there was no need to go to the black market or bureaux de change to get forex when you could get it officially from your bank. Nigeria was awash with dollars and bankers at the time spoke of not even needing to go to CBN for dollars for weeks. Indeed, they say CBN staff used to harass them as to why they had not come to buy dollars. This was the period when the naira gained about 20% against the dollar without anyone explicitly trying to ‘strengthen’ it.
And then the inevitable happened — oil prices started to fall from late 2008 to less than $50 by the end of the year. But this time around, Nigeria was in a pretty good position to weather the storm with reserves totalling around $62 billion. Nevertheless, Soludo engineered some kind of artificial scarcity of forex to allow a devaluation of the naira. He also banned the Interbank market for six months.
All these when Soludo took office, the naira was trading at 127 naira to $1 and by the time he left in 2009, it was around the 147 naira mark. But this masks the fact that in 2008, it actually went as low as 115 naira to $1 at one point. Oil prices started to recover pretty quickly and so if Soludo had done nothing, it would have just cost Nigeria some of its reserves and normal service would have resumed after about eight months. But the temptation to ‘do something’ is always strong.
Given that oil prices remained high throughout SLS time in office, some measure of stability was achieved. The naira was trading at 148 naira to the dollar when he took office in 2009 and was 164 naira by the time he was suspended from office in February 2014. The stability of the graveyard.
But by the time Godwin Emefiele, Nigeria’s central bank governor took over office, it costs something like $30 to extract a barrel of crude oil in Nigeria. So when oil was trading at $110 Nigeria had a margin of around $80 to play with. But when oil drops to $45 as it has now, that $80 margin turns to $15 as the cost of getting the oil out of the ground still has to be incurred.
To put the above numbers another way — while oil prices have dropped by 60%, the revenues available to Nigeria have dropped by 81%. That is, revenues have dropped much more than oil prices have dropped. Nigeria is earning almost nothing these days and you can imagine how disastrous it will be if oil prices drop further to $40 or even less.
Rumours of privileged people making a fortune from the confusion and arbitrage are circulating among bankers once again, the only solution now to equilibrate the exchange rate is to return back to those days where we value made in Nigeria products, lets encourage local goods and reduce imports.
<<By Dr Tom Ohikere
