Decline and fall of the Naira

Money makes the world go round. The strength of a country — its prosperity and flourishing — is best measured by the standing of its currency. The American business magnate and politician, Ross Perot, observed that, “a weak currency is the sign of a weak economy, and a weak economy leads to a weak nation”.

Money is a public good, defined as  that class of commodities or services that freely benefits all members of society. Money fulfils three economic functions: a unit of account, a store of value and a vehicle for facilitating transactions. It is also a national symbol — an embodiment of a country’s honour and prestige.

The Central Bank Nigeria (CBN) was established on 1st July 1959, at the eve of departure of the colonialists. The Nigerian pound (N£) was created to replace the old West African shilling. During 1968, at the peak of the civil war, some modifications were made to secure the currency from threat of debasement.

During the post-war era, Nigeria decided to replace the British imperial system of weights and measures with the continental metric system. In January 1973, the naira replaced the Nigerian pound, at the rate of N1 to UK10 shillings. The Bank of England ceased to be guarantor of our legal tender currency. Britain itself was shedding off her Commonwealth Trade Preference System as it prepared to join the European Common Market.That successful transition was managed by finance minister, Chief Obafemi Awolowo, who also coined the term “naira”. The N10 note had been the highest denomination at the time. In 1977, the N20 note was introduced, bearing the face of the assassinated General Murtala Ramat Mohammed. There have been subsequent currency changes over the years, culminating in the N1,000 note as our highest note today.

Ever since the Bretton Woods settlement of 1944, the dollar has been the world’s reserve currency. The dollar exchanged at a fixed parity with gold at the rate of $35 to 1 ounce of gold, until 1971, when, due to balance of payments constraints, President Nixon unilaterally revoked the gold-dollar exchange system. Ever since, the international monetary order has been governed by a system of floating currencies. In 1973, Secretary of State Henry Kissinger reached in agreement with the House of Saud, whereby, in exchange for American military protection, the dollar would have sole monopoly as the currency for international oil trading. For better or worse, the dollar would heretofore also remain the key anchor and benchmark for our naira.

In 1960, the N£ exchanged at $0.71. After the introduction of naira in 1973, our new currency exchanged at N1 to $0.62. The Babangida military dictatorship marked a turning point. Naira suffered a massive devaluation, exchanging at $1.75 to the naira in 1986. The neoliberal structural adjustment policies that the regime pursued under the tutelage of the IMF/WB saw the naira fall to N22 to the dollar by 1994.

At the wake of the Fourth Republic in 1999, the naira was exchanging at N92.34 to $1; further falling to N132.89 in 2004. When President Goodluck Jonathan handed over power to Muhammadu Buhari in May 2015, the naira exchanged at N198.914 to $1. By 2018, it fell further to N306.08.

If performance on the currency sector was any yardstick on which to elect a candidate, Buhari would have been resoundingly disqualified. And yet, the electorate gave him a second mandate in May 2019. The spendthrift profligacy, monumental incompetence and grand larceny of the regime have virtually destroyed the naira. By May 2019, the naira exchanged at N360 to $1. With the recent announcement by the CBN that they are withdrawing forex allocations to BDCs in preference for the commercial banks, we have seen the naira plummet to N520 in the parallel market.

Nigeria is a monocultural import-dependent economy. Whilst oil no longer accounts for the bulk of budget revenues, it still accounts for more than 90% of our foreign earnings. When oil prices tumble, our naira goes into a tailspin; sending inflationary pressures throughout the economy.

The value of a national currency is shaped by several factors. Let me mention the ones that are particularly germane to us.

First, inflation. Over the past decade, high inflation has been a persistent phenomenon in our economy. In 2021, headline inflation stands at nearly 18 percent.The American economist Murray Rothbard once noted that, “inflation not only raises prices and destroys the value of the currency unit; it also acts as a giant system of expropriation”.Inflation is not only a tax on the poor; it discourages savings and investments while ultimately undermining welfare and growth prospects. It also renders the currency weak against those of competitors.

Second, the current account balance — the total number of international trade transactions (imports, exports and debts) is crucial. A positive account bolsters the exchange rate while a negative one weakens it. At year’s end 2021, the ratio of our current account balance to GDP is projected to be -2.70 percent. When a country has to spend its dwindling foreign exchange in settling payments for its imports, it could lead to currency depreciation.

Thirdly, debt. Nigeria’s current debt stands at a staggering N33 trillion ($87 billion), amounting to 35% of GDP. This year alone, we are projected to spend more than 90% of government revenues on debt-servicing. High debts will further weaken the naira.

Fourth, the terms of trade. This refers to the ratio of export prices to import prices. If the prices of our exports are rising faster than those of our imports, it enhances our currency value. Unfortunately for us, the reverse is the case. Global oil prices have been heading south while prices of advanced-country industrial manufactures have been heading north.

Fifth, economic recession. Nigeria has seen two major recessions in five years. The 2015-2017 recession was triggered by the fall in global oil prices while that of 2019—2020 was attributable to the novel coronavirus crisis. Recession undermines public finances while dampening overall business confidence and further crippling the naira.

Sixth, political instability. Nigeria has virtually been at war with itself for more better part of a decade. This has been worsened by a regime inspired by bad faith, nepotism and exclusion. This is fostering geopolitical tensions, youth rebellion and ethnic demands for self-determination. The naira and the economy are the worse for it.

Seventh, currency speculation. Due to geopolitical uncertainty, capital is taking flight to zones of safety. Africa’s richest man, Aliko Dangote, recently announced that he is shifting 60% of his investments to New York. Nigerians are offloading naira and storing their assets in dollars. The naira is bound to further weaken as a consequence.

Eighth, dollarisation. Dollarisation is when the dollar practically replaces the home legal tender currency as a store of value and medium of transactions. The CBN has issued directives against invoicing in dollars. But they are only obeyed in the breach. Landlords in high-end districts and high prestige international schools are quoting fees in dollars rather than naira. Dollarisation is bad for the naira.

Ninth, poor monetary policies. The CBN, in our view, has fallen prey to political capture by vested interests. Monetary authorities lose policy credibility when their policies are driven by private interests rather than the common good. CBN has departed from its core mandate and is pursuing chimeras. It has structured trillions of naira worth of so-called “interventions” that have never been subjected to independent evaluation. We can never tell if the medicine has not been more costly than the malady it aims to cure. The effectiveness of a central bank – and the long-term standing of its currency — depends on its policy credibility and the integrity and competence of its leadership.

Finally, political leadership. The lexicographer Daniel Webster declared long ago that “a disordered currency is one of the greatest political evils”.Leaders with vision and competence would tend to bolster a stable national currency. But when a country is run by goonies, you can only expect a doomsday scenario.

The Russian Bolshevik revolutionary leader, V. I. Lenin, declared that “the best way to destroy the capitalist is to debauch the currency”.I would say that the best way to debauch a currency is to place the levers of power in the hands of incompetent and greedy leaders.

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