eneral Ibrahim Babangida, the country’s then-Military President, started the Structural Adjustment Programme (SAP) in 1986 with the goal of developing non-oil sectors. Nigeria, which was suffering from a debt crisis and a debilitating revenue shortfall, sought a loan from the International Monetary Fund (IMF). Following a nationwide debate in which Nigerians were opposed, Babangida stated that Nigeria would not accept the loan but would comply with the conditions, which included economic restructuring.
Until then, the Nigerian Central Bank (CBN) set the exchange rate. The Naira had always outperformed the Dollar. From the beginning of the oil boom in 1973 through the introduction of SAP in 1986, a Dollar was sold for anywhere between 60 and 80 Kobo. There was no magic involved: we were awash with cash. To be more precise, we were awash in cash, Petrodollars. Following Israel’s invasion on Egypt and Syria in October 1973, Arab countries boycotted the international oil market in protest and support. This resulted in a five-million-barrel-per-day reduction in production. Between October 1973 and March 1974, worldwide oil prices tripled as a result of the scarcity.
By December 1974, crude oil that cost $3 per barrel in 1973 had risen to $12 per barrel. From 1973 to 1978, we averaged $4 billion in oil earnings per year, up from only $200 million in 1970. The sensation of jumping was enthralling. Even though we felt we were having a good time, that was the start of our trouble. Nigeria was affected by the Dutch Disease, which is an economic term that depicts a situation in which a large supply of petrodollars causes a strong local currency, making imports cheaper and exports more expensive, and eventually leading to de-industrialisation. Importing a bottle of water has become less expensive than producing it in Nigeria. Our exports had lost their competitiveness.
After a drop in oil prices in 1978/79 as a result of a number of developments — for example, Japanese manufacturers introduced fuel-efficient cars, the US began exploring for oil in the Gulf of Mexico, and companies began a scheme to purchase pool cars for their employees to reduce fuel consumption — the black gold was back on its feet in 1980. Nigeria earned $22.4 billion in that year, with a 55 kobo to $1 exchange rate. Of course, we resumed our opulence and forgot about the next day. Aren’t we Nigerians? The worldwide economic crisis of 1982 took a toll on us. The amount of money made from oil fell to $9.6 billion. We had become import-dependent due to the Dutch illness, and local factories were withering.
There is also the problem of a natural resource’s torrential revenue crowding out other sources (like cocoa and groundnuts) and creating a negative reliance on one source. This has a significant impact on an economy that revolves entirely around Government. Oil accounted for 57.2 percent of our exports in 1970, 92 percent in 1974, and 92 percent today. We would not have been stung as severely by the drop in oil prices if we were earning foreign exchange from numerous sources. Oil money encourages slacker, wasteful, and lavish behavior, from increasing government size to developing a taste for foreign products. We lose our heads when oil costs climb. We clench our teeth when they fall. This is our life’s narrative.
While the crisis continued, the exchange rate remained around 60 Kobo to $1, depleting our reserves in order to keep the Naira alive. We had barely $1 billion in reserves by 1982, down from a healthy $10 billion in 1980. We were no longer credit-worthy enough to import things, especially food. A country with vast acreages of fertile land that should have been producing and exporting rice and milk has become hopelessly reliant on food imports. Importing raw materials and spare parts was difficult for manufacturers due to a lack of currency. Shutdowns and cuts were unavoidable. Politicians and cronies hijacked the import license system, which was intended to allot currency to manufacturers.
So, what happened after that? Many of the CBN’s preferred currency receivers moved it to the streets for arbitrage, resulting in the birth of the black market, or parallel market. Since 1982, we have had to deal with this abnormality. Why? The fundamental problems have remained the same: we are import-dependent and do not earn enough forex to import; the forex entering the economy is primarily from oil exports, with revenue going to the government; the government is virtually the only source of forex supply; and the CBN remains the central figure in determining the allocation and rate at which forex will be bought and sold. And so on.
Babangida’s establishment of the second-tier foreign exchange market (SFEM) in 1986 was an attempt to contain the black market. The first-tier tariff, which was set at N1 to $1 (99 Kobo precisely), was exclusively for the government. Other FX users were assigned to the second tier. Officially, the government desired a currency that could be freely exchanged at SFEM in order to prevent arbitrage. In actuality, the Naira had depreciated. It debuted at N4 per $1. Since then, it has continued to depreciate. The current exchange rate is N411 to $1. Why? The core issues remain the same: we are import-dependent, we do not generate enough forex to import, and the currency that enters the economy primarily comes from oil exports.
Now that the Naira has been significantly tested once more, my concern remains: has anything changed to give us optimism that we will eventually achieve stability? You cannot expect your currency to be steady if you make $1 from exports and need $2 to cover your import bills, especially if you are stuck with one large export whose price you cannot control. That is why many economists believe the Naira is overvalued: when demand exceeds supply, price adjustments are inevitable. The government is aware of this and has begun to alter rates, but not at the pace and rate that some would prefer. In 2014, the currency rate was N155 for $1. It is currently N411 to $1.
As long as the economic structure stays unchanged, there will never be an end to devaluation. As long as the relationship between forex outflows and forex inflows is unhealthy, the Naira will be seriously harmed. The cost of living will continue to rise as long as we rely on imported commodities, particularly food. Poverty, unemployment, disease, and crime will continue to harm Nigerians unless we raise their standard of living. Inequality will deteriorate. This is something we must be clear about. That is why it pains me that, in the face of such a severe situation, we are still mired in needless spending and blatant corruption.
What I have seen is that there are numerous adversaries fighting the Naira at any given time. I lay the blame firmly on the government’s shoulders. Or, to put it another way, management. I am not going to sit here and bemoan the mistakes we made in the 1970s when we began to drown in petrodollars. We cannot do anything about it. We blew the chance. We cannot go back in time. However, some of our policy decisions since the 1980s, when we first started encountering economic crises, have not been beneficial. Hence, the value of the Naira will continue to fall, with little benefit to the economy or the people.
In this piece, I will just describe three “adversaries.” One is local refinement. Imports of petroleum products, particularly gasoline, diesel, and aviation fuel, put the most strain on the currency today. Essentially, we export crude oil and then use the majority of the foreign earnings to purchase refined products. How can the Naira not depreciate? It would be a great comfort for the naira if the fuel import component of FX demand were removed today. Some of us have previously advocated for the government to develop refineries so that we can stop importing goods. We were taught that refineries were the responsibility of the private sector. Now we have arrived.
I was following what I thought was a more reasonable position: private sector investors wanted the pricing mechanism of petroleum products free of government control, or they would not invest in building refineries. However, lowering fuel prices would come at a high social and political price. My proposal at the time was that the government should build refineries, lease out management, meet local demand, and even begin exporting to make forex from both crude and products, and then sell the refineries to core investors and on the stock exchange to kick start the process.
A powerful oil executive I contacted “taught” me that there was little difference between importing petroleum goods and refining them locally. “The only difference is the cost of shipping, which is insignificant. Shipping is the most cost-effective way of transportation on the planet.” However, when you spend almost half of your oil revenue on petroleum imports, there is a significant difference: your forex reserves will be depleted, and the Naira will be attacked, despite the fact that you are locking out manufacturers and other currency users. The story would be different if we are refining locally rather than importing items.
The status of our education is the second opponent, and our health-care system is the third. These two products, according to the CBN, consume billions of dollars annually. We are all aware that the country’s educational and health-care standards have deteriorated over time as a result of ineffective and self-serving leadership at various levels. Constant strikes aggravate the situation. Anyone who can afford it will take advantage of the opportunity to study or receive treatment in a foreign country. The forex demand for these two commodities places enormous and unneeded strain on our foreign exchange reserves, humiliating the Naira. I could go on and on, but these three topics are the ones that I believe we can all connect to.
Surprisingly, if we were productive, it would not matter whether the exchange rate was N1000/$. The underlying issue is the quality of life that the currency can provide for Nigerians, which relates to deeper structural difficulties as well as the economy’s size in comparison to our people. The Indonesian rupiah is currently trading at 14,228 to the US dollar, although the GDP per capita (purchasing power) stands at $12,800. $5,250 is the price of ours. Indonesia is a developed country that produces the majority of its food and exports palm oil, steel, textiles, and vehicles, among other things. What can Nigeria sell to the rest of the world besides oil? How can we improve our educational attainment, as well as our health, security, and productivity? We still have a long way to go on our way to development.