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The Naira and Its Many Enemies

SimonKolawolelive By Simon-Kolawole, Email:, sms: 0805 500 1961


When you sow the wind, you reap the whirlwind. This always comes to mind anytime there is an outbreak of debate over the naira. It is a discussion we have been having since, I think, 1986 when Gen Ibrahim Babangida, then military president, launched the structural adjustment programme (SAP) essentially to develop the non-oil sectors. Nigeria was facing a debt crisis and a crippling revenue shortfall and wanted to take a loan from the International Monetary Fund (IMF). After a nationwide debate in which Nigerians opposed it, Babangida, if I recall well, said we would not take the loan but would implement the conditionalities — which bordered on economic restructuring.

Until then, the Central Bank of Nigeria (CBN) fixed the exchange rate. The naira was always stronger than the dollar. From the advent of the oil boom of 1973 up till the introduction of SAP in 1986, a dollar was sold for between 60 kobo and 80 kobo at various points. There was no magic to it: we were swimming in dollars. Let me be more accurate: we were drowning in dollars. Petrodollars. The October 1973 attack on Egypt and Syria by Israel had led to the boycott of international oil market by Arab countries in protest and solidarity. This caused a cut in production by over five million barrels per day. The shortage saw global oil prices tripled between October 1973 and March 1974.

The crude oil that was selling for $3/barrel in 1973 was going for $12/barrel by December 1974. While our oil earnings in 1970 amounted to just $200 million, we started averaging $4bn per year from 1973 to 1978. The jump was intoxicating. That was the beginning of our problem, even though we thought we were having fun. Nigeria was hit by the Dutch Disease — an economic concept that describes a situation where a glut of petrodollars leads to a strong local currency, making imports cheaper and exports more expensive, and ultimately leading to deindustrialisation. It became cheaper to import a bottle of water than to make it in Nigeria. Our exports became uncompetitive.

After a fall in oil prices in 1978/79 as a result of many developments — for instance, fuel-efficient cars were introduced by Japanese manufacturers, the US started exploring oil in the Gulf of Mexico and companies started a scheme of buying pool cars for their staff to reduce fuel consumption — the black gold was back on its feet in 1980. Nigeria earned $22.4bn that year alone and exchange rate was 55 kobo/$1. Of course, we resumed our extravagance and forgot about tomorrow. After all, are we not Nigerians? The global economic crisis of 1982 bit us badly. Oil revenue was down to $9.6bn. With the Dutch disease, we had become import-dependent and local factories were dying.

There is also this issue: torrential revenue from a natural resource crowds out other sources (such as cocoa and groundnuts) and creates a harmful dependency on one source. This seriously distorts an economy where everything revolves around government. Oil went from being 57.2% of our exports in 1970 to 92% in 1974 — and till this day. If we were earning forex from multiple sources, the fall in oil prices would not have hit us that hard. Oil wealth encourages lazy, wasteful and extravagant behaviours: from expanding the size of government to acquiring tastes for foreign goods. When oil prices rise, we lose our heads. When they fall, we gnash our teeth. This is the story of our lives.

While the trouble went on, exchange rate remained at roughly 60 kobo/$ while our reserves were getting depleted to keep the naira alive. From a fairly handsome reserves kitty of $10bn in 1980, we had only $1bn by 1982. We were no longer creditworthy to import goods, particularly food items. A country with massive arable land that should be producing and exporting things like rice and milk had become hopelessly dependent on food imports. Manufacturers had little or no forex to import raw materials and spare parts. Shutdowns and retrenchment were inevitable. The import licensing regime — introduced to allocate forex to manufacturers — was hijacked by politicians and cronies.

What happened next? Many of the favoured receivers of forex from the CBN diverted it to the streets for the arbitrage — and the black market, or parallel market, was born. We have been living with this anomaly since 1982. Why? The fundamental problems have remained the same: we are import-dependent and we do not earn enough forex to import and the forex coming into the economy are mainly from oil exports and the revenue goes to the government and government is virtually the only source of forex supply and the CBN remains the central figure in determining the allocation and the rate at which the forex will be bought and sold. And so on and so forth.

The introduction of the second-tier foreign exchange market (SFEM) by Babangida in 1986 was an attempt to cage the black market. The first-tier rate, fixed at N1/$ (99 kobo actually), was solely for the government. The second tier was for other forex users. Officially, the government wanted a currency that would be traded freely at SFEM to eliminate arbitrage. In reality, the naira lost value. It started trading at N4/$ on its debut. It has not stopped losing value since then. It is now N411/$. Why? The fundamental problems have remained the same: we are import-dependent and we do not earn enough forex to import and the forex coming into the economy are mainly from oil exports…

Now that the naira is seriously challenged yet again, the question for me remains: has anything changed to give us hope that we will reach stability at a point? You cannot be earning $1 from exports and needing $2 to pay your import bills and think your currency will be stable, especially as you are stuck with one major export whose price you don’t determine. That is why many economists insist the naira is overvalued: when demand is higher than supply, price adjustment is a natural consequence. The government knows this and has been adjusting the rates, albeit not at the pace and rate some would want it. The exchange rate was N155/$ in 2014. It is now officially N411/$.

There would never be an end to devaluation as long as the economic structure remains as it is. The naira will continue to be severely challenged as long as the relationship between forex outflows and forex inflows is unhealthy. Cost of living will keep rising as we keep depending on imported goods, especially food. And except we improve the standard of living of Nigerians, poverty, unemployment, disease and crime will continue to hurt us. Inequality will worsen. We need to be clear on this. That is why it breaks my heart that, confronted with this dire situation, we are still enmeshed in wasteful spending and brazen corruption. Nobody should be surprised that Nigeria is like this.

What I have…

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