IT was in July 1944 that a meeting was scheduled for Bretton Woods, New Hampshire, USA. The meeting, Bretton Woods Conference, which was also known as United Nations Monetary and Financial Conference, was held to make financial arrangements for the post-war world.
The conference, which was held July 1 to July 22 of 1944 and was attended by monetary and financial experts drawn from 44 nations, including the Soviet Union, came up with a target for the International Bank for Reconstruction and Development (IBRD) to make long-term capital available to states urgently needing such foreign aid and a project for the International Monetary Fund (IMF) to finance short-term imbalances in international payments in order to stabilise exchange rates.
After the endorsements by the stakeholders, the IBRD was constituted in 1945 and the IMF in 1946. The IMF’s mandate include, among others, securing international monetary cooperation, stabilisation of currency exchange rates and expansion of international liquidity (i.e. access to hard currencies). Ever since, the institution has been performing its duties in the areas of financing short-term balance of payment deficits of member-countries and providing advice and technical assistance to borrowing countries, in addition to stabilising currency exchange rates.
Dateline 1973, the Nigeria’s military government introduced Naira as a replacement to the pounds sterling that had served as legal tender since the British colonisation of the country. The exchange rate was two of the Naira to one pound. Up until 1985, and despite gradual degeneration of the economy, Nigeria’s currency (naira) value was stronger than the US dollar. The average exchange rate then in 1985 was 0.894 to one dollar; that is, one dollar was only worth 89 kobo in Nigeria, thanks to the manufacturing companies that were producing, safe to say up until early 90s.
The IMF stepped in 1985 when it pressured the Babangida government to devalue Nigeria’s naira. Therefore, Nigeria’s currency experienced its first devaluation in 1985 as a result of crisis occasioned by bad governance of the economy that the nation was witnessing.
Devaluation makes a country’s currency weaker when placed side by side other countries’ currencies. There are reasons that will make one deliberately choose this policy. Devaluation can be used to boost exports, close the gap on trade deficits, and reduce in size the cost of interest payments on government debts. But Nigeria is an interesting case study.
Right from the days of oil boom in the 70s, Nigeria turned away from local production and steadily from manufacturing of products to consumers of what other nations are producing. We chose to prefer reliance on the rents that multinational oil companies are making available from oil prospects which the successive unitary, military governments were sharing to component parts that make up the country.
As a result of intractable and ever-mounting inflation that had caused naira value to depreciate significantly over time, the naira was redenominated in 1991. But the effect was like pouring a bowl of water to quench an inferno. The much-needed local production of goods and services were lacking; thereby worsening the economic situations.
Like Oliver Twist, the IMF has been on Nigeria’s case ever since 1985 and always insatiably advising and demanding naira devaluation. But what is surprising is that this institution that always advising and demanding devaluation of Nigeria’s currency could hardly be found to speak for local production of goods and services as a measure to reduce pressures on foreign currency demands. In the words of the former CBN governor, Mallam Sanusi Lamido Sanusi, in a piece he wrote and published in 2002, when the IMF recently owned up to mistakes in its policy prescriptions, all patriotic economists saw it for what it was: a hypocritical statement of remorse after attaining set objectives”.
In a layman’s language, you devalue currency when you can produce goods and services locally, cheaply, and at a scale above your local needs so that you are able to export the excess to other countries. Japan devalued YEN because it is a producing country. Likewise China devalued Yuan due to its status as a production hub for cheap goods and services. As at the time of writing this piece, an exchange rate of Yen to dollar stands at 140.69/$ while Yuan is 7.14/$. This explains why most of products in the western countries are produced in the Asian countries. Furthermore, it is great to devalue a currency to discourage importation of finished goods and services from other countries so that one’s local economy does not become a dumping ground for foreign products. The foreign investors should find your production environment conducive enough and cheaper to produce and transfer (export) to economies with higher costs of production.
But the reverse is the case in Nigeria. Over time, Nigeria has become a consuming state. Today, we hardly produce any goods and services; and the ones we managed to produce at micro scale are abandoned for imported ones. Consumption of foreign products had become a status symbol and local producers are struggling to compete.
Nigerians appetite for foreign goods and services had bedevilled the country’s economy with huge foreign currency demands. Such areas of huge forex demands include, but not limited to education (where an estimated two billion pounds are invested in UK economy annually), imported finished products, medical and religious tourism, expatriation of earned funds (by foreign Investors), fund transfers to foreign accounts by Nigerians for safekeeping, hoarding (hedging) by exporters, speculators activities, and politicians’ dollarisation of political space. These unholy appetites coupled with dual exchange system which allow for unhealthy arbitrage and systemic destruction of the economy call for immediate intervention that will not only put a stop to the activities of the individuals, financial institutions and organisations that are happy that a country with over 200 million people should remain the poverty capital of the world, with ever-mounting unemployment and underemployment of the citizens.
The attempt of Bola Tinubu’s administration to collapse the dual forex market by floating the forex market tickles not a few.
Financial experts and investors globally believe it is the best decision to come out of Nigeria’s seat of power in decades. It means that the “Willing Buyer, Willing Seller” (I&E market) will now serve as the major trading platform, allowing the forces of demand and supply to determine price.
Expected response will mean that the black market transactions will reduce as more Nigerians will be willing to remit forex through the official route.
Supplies to I&E window is expected to increase and possibly force down rates. The probability is high that foreign investors will regain confidence in Nigeria’s economy, that they can remit their investments and proceeds whenever they wish without hindrance. As a result of this, it is also expected that forex supplies will increase to further drive down the exchange rate to the advantage of naira value. Exporters who have hitherto been hoarding their foreign currencies will need to sell more in the I&E market. This will also increase supply that will force down rates. The forex speculators’ activities are expected to nosedive and reduce significantly because of the single rate market. The wide and unhealthy margins for arbitrage between the official and parallel markets will shrink and may disappear altogether. Demand pressure is expected to reduce, with no more hoarding, and it will free supply for real forex users.
However, there will be increasing costs of imported products and services (at first instance) before Nigerians begin to adjust to realities. This means that there is no respite yet for production/manufacturing sector that rely on imported tools until forex rates fall significantly and become steady. Therefore, for the rates to drop, there must be monetary and fiscal policies that will encourage increasing supply and discourage demands for dollars (and other foreign currencies). Government must intervene or subsidise provision of equipment needed by critical sectors like agriculture for local productions.
On a final note, President Bola Tinubu’s government needs to do more than floating the currency exchange. Concerted efforts must be taken, as a matter of economic recovery policy, to discourage demands for foreign currency for consumption of imported finished products by stimulating local productions. Nigerians must find it pleasing to prefer Nigerian made goods and services when the costs of foreign competing goods and services are considered.
- Ola Emmanuel is a business planning consultant and founder of Leacent Incorporated Trustees, a network of entrepreneurs and group of cooperatives. He works with a team of international consultants to conceptualise and plan agribusiness and housing projects.
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