Naira: The Story of a Once-Upon-a-Time ‘Powerful’ Currency, by As-sayyidul Arafat

When writing this article, the dollar traded against Naira in the Black Market for #705/$. What initially started from #2 to €1 in the United Kingdom and #1 to $0.6 in the United States in 1973 has come down to this level.

Inflation is no longer a strange economic jargon for the citizens of Nigeria. It has its pros and cons, but the cons overshadow the pros. Inflation is something which sometimes may not be entirely bad for the economy. Moderate inflation has a beneficial effect on production and is often preferred to deflation or falling price.

It encourages business people to invest their capital in productive enterprise. New industries are erected while the old ones are being expanded, leading to an increase in employment.

But in the worst-case scenario, moderate inflation can accelerate to become a “galloping inflation”. It can become hazardous when prices skyrocket, and the purchasing power is persistently ahead of the supply of goods and services, and it may get out of control.
One could say inflation and devaluation of a currency are interconnected.

Four decades ago, one could get less than #6.1 Million ‌for $10 Million. Then a dollar was equivalent to 61kobo which implies Naira has more Value than Dollar. The same cannot be said four decades after as Naira has lost 99.8% of it value against the dollar, going by how #7.5 Billion now exchanged for $10 Million.

To explain how we got here, let’s examine Nigeria’s Economy from 1973. When Naira was introduced till date.

*President Ibrahim Babaginda and Second-Tier Foreign Exchange Market (SFEM)*

The fall of the mighty Naira can be traced back to the then Nigeria Head of State, General Ibrahim Badamosi Babangida tenure 1986, he introduced the Second-Tier Foreign Exchange Market, sometimes known by the acronym SFEM. Until the middle of 1987, the initiative was effective. The market window was open to Nigerians and foreigners, and the initial plan was to find a market rate for the naira. The SFEM was the first time a Nigerian government floated a dual exchange rate system. But by the time his inglorious regime ended on August 26, 1993, the naira was exchanging for #17/$1. During this time, the now famous “Bureau de Change” was introduced.

*President Sani Abacha (1993-1998)*

During General Sani Abacha’s military regime (1993-1998), the official exchange rate of the naira to the dollar was stable at #22/$1, but the market rate was #88/$1. The Foreign Exchange Market was liberalised in 1995 by introducing an Autonomous Foreign Exchange Market (AFEM) for the sale of foreign exchange to end-users by the CBN through selected allowed dealers at the market-determined exchange rate. In addition, Bureaux de Change was once more accorded the status of allowed buyers and sellers of foreign exchange. A lot of banking fortunes were made from this arbitrage.

*Joseph Sanusi (CBN governor 1999 to 2004)*

When Joseph Sanusi became the CBN Governor in 1999, he introduced the Interbank Foreign Exchange Market (IFEM), a foreign exchange market where banks exchange different currencies. The banks can either deal with one another directly or through electronic brokering platforms.
Nigeria’s reserves had been severely depleted two years before he became governor, and it was his solution to rescue the naira. The naira started trading at #85 within a year, and the gap between the official rate and market rate had reduced considerably to #105/$1 compared to how it was under Abacha.
Besides low oil prices, Nigeria was struggling to service its $33 billion foreign debt, which was eating up the valuable foreign exchange.
Sanusi later suspended the IFEM for six months when the naira came under pressure, and he introduced a limit to the margin, above CBN’s rate, that banks could sell their forex for. The same is being done by the current CBN Governor, Godwin Emefiele.

*Chukwuma Soludo (2004-2009) and the Oil Boom*

In late 2003, rising oil prices increased Nigeria’s foreign reserves and the Excess Crude Account. The CBN Governor Charles Chukwuma Soludo was able to harmonise the four different rates at the time: the CBN, Interbank, Bureau de Change, and wire rates. This converged the rates to within #1 of each other. This was when the naira gained about 20% against the dollar with no one explicitly trying to ‘strengthen’ it.

Unfortunately, oil prices dropped. Nigeria was in a 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.
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 went as low as 115 naira to $1 at one point. Oil prices recovered quickly, 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.

*Sanusi Lamido Sanusi (June 2009-Feb 2014)*

His successor, Sanusi Lamido Sanusi, in 2009, then restored the Interbank market that Soludo had banned because of the rise in oil prices, but faced stagnancy in Nigeria’s reserves because of scarcity of dollars to defend the naira. His solution to the problem was to remove the one-year restriction on foreign investors who wanted to buy government bonds.
This move saw Nigeria being included in JP Morgan’s index. Given that oil prices remained high throughout Sanusi’s 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. His era was known as the stability of the graveyard.

*Godwin Emefiele Till Date*

In today’s economy, revenues have dropped much more than oil prices. Is Black Gold (Crude oil) a blessing or a curse to Nigeria? Because of our overdependence on it. What is worse is that Nigeria did not save during the oil bloom and our reserves are probably less than the $30 Billion that was declared.
Governor Emefiele has done the usual in response. He has banned the Interbank forex market and 41 items from being eligible for forex, directly undoing what Soludo did. Forex is now essentially being rationed, and the CBN is deciding who gets what and how much. The current debate continues to be around whether or not Nigeria should devalue the naira.

What we learn from all of this is that Nigeria does not know how to spend oil money. What is expected of us is to save when the oil price is high and use the saved reserve when the price is low. This is not the case for Nigeria as we spend more when the oil price is high, and when the price gets low, we have little profit margin to work with. Our revenue drops then we question ourselves on why we import rice when we can grow it here.

Nigeria is so blessed to be dependent only on crude oil. Before the advent of oil, we were into Agriculture. Tourism is an untapped cash cow Nigeria is not using. We need to diversify our income