en million dollars could get you less than N6.1 million in 1981. A dollar was worth 61 kobo in those days. However, based on how N4.1 billion presently swaps for $10 million, the Naira has lost 99.8% of its value against the dollar during the last four decades. This is the most precipitous drop in the history of any currency.
In the subsequent years, the Naira has undergone dozens of devaluations, the majority of which were carried out in the hope of attaining a fair value for the currency, which has, interestingly, followed a pattern similar to commodity currencies around the world. The Central Bank of Nigeria (CBN) raised the official rate from N307 to N360 per dollar in March of last year. In the next year, the exchange rate was reduced to N380 per dollar. The CBN’s official rate was replaced with the I and E(Investors’ and Exporters’) Window rate this year, which was created as a result of the currency crisis.
Managing a commodity currency in any part of the world comes with the risk of contracting a terminal illness. It breaks down just when one believes there is a pause. The top bank has experimented with all known currency management measures since the 1980s, while the Naira has fluctuated against its peers, even within the African sub-region. Each freshly accepted promise promises a lot but delivers very little.
Under the leadership of Prof. Charles Soludo, the apex bank considered revaluation – a plan that would simply remove two zeroes from a denomination to restore the currency to its former glory. For example, a 500 banknote was to be revalued as N5. However, the idea, like other initiatives, did not withstand the numerous political intrigues that surrounded its execution. The Soludo solution is probably one of the few concepts that Nigerians do not have the benefit of hindsight on.
Many Nigerians attribute the Naira’s historical problems to the infamous Structural Adjustment Policy (SAP). Indeed, the Naira soared from 89 kobo to a Dollar in 1985 to N4 to the Dollar under the SAP, which many experts criticised as ill-conceived.
To approve facilities for Nigeria, the World Bank and the International Monetary Fund (IMF) imposed various criteria, one of which was the adjustment of the currency rate. That currency has been on a roller coaster since then, with numerous significant liquidity problems in the middle. During each crisis, devaluation is proposed with the idea that a fair value would stimulate foreign capital inflows, which an inflated Naira tends to repel.
In recent years, the issue has been more entrenched in the foreign exchange discussion than at any previous point in history. The decision to alter the Naira to N193 to the dollar in 2015 was based on the expectation of large capital importation. A year later, a similar argument was used in support of yet another currency devaluation.
The devaluation measures made last year were also made in order to attract the capital inflows needed to shore up liquidity. The Naira, on the other hand, is regarded as overvalued, a point made public by Vice President Yemi Osinbajo.
Certainly, the interaction between some elements, such as demand and supply, the volume of exports in proportion to imports, and the performance and competitiveness of the local economy, determines the strength of a currency.
A stronger currency does not equal a stronger economy, as Kingsley Moghalu, a former Governor of the Central Bank, has repeatedly stated. A stronger economy, on the other hand, will eventually yield a stronger currency. Following this rationale, China was accused of devaluing its currency to acquire a competitive advantage in the global market at some point.
As a result, a weaker currency is preferable for an economy seeking to compete on the worldwide market. But, if the Naira has lost almost 99 percent of its value against the dollar over the last 40 years and is still regarded as overvalued, at what point will its true worth emerge?
While Nigeria might use the chance to enhance foreign demand for its commodities to create more employment and expand local capacity, there is no denying that the country faces other pressing issues that a weaker currency cannot address. If a Dollar is swapped for N5,000 tomorrow, and other Africans swarm Nigerian markets to buy the dirt-cheap made-in-Nigeria goods, the producers can only sell the quantities that their various constraints allow.
This indicates that a significantly lower Naira may not be able to alleviate the endemic insecurity problem that has driven farmers away. It will not solve the problem of inadequate local input sourcing. The past logistics issues are unlikely to be addressed by a suddenly weakened Naira. Transporting some raw resources from, say, the North to Lagos is more expensive than bringing the same materials from Asia or Europe. A weaker Naira will merely increase the cost of importing such goods, making local industries that rely on them less competitive than their competitors in other African countries.
Nigeria hopes to be the economic powerhouse in the region, a position that South Africa and Egypt are also vying for. The country leads the continent’s economies by sheer size of its gross domestic product (GDP), not by any qualitative measures. It is followed by South Africa and Egypt. However, the Naira remains one of the continent’s weakest currencies. In terms of par value, the Naira is only ahead of the Angolan kwanza and Tanzanian Shilling among the top ten economies. The Egyptian Pound is trading for N26, while the Rand is trading for N28. Ghanaian Cedi, Kenyan Shilling The Naira is also outperformed by the Ethiopian Birr, Moroccan Dirham, and Algerian Dinar.
But it was not always like this; the Naira used to be associated with strength and stability, which means it has continually lost value against its peers. While a cheaper Dollar gives an economy a competitive advantage in the marketplace, the Dollar is not permitted to swing, and news of a weaker Dollar is not welcomed. Even China has realised that it cannot claim to be the regional leader if its currency is weak.
A lower Naira is expected to attract more foreign funds and investments. However, historical evidence contradicts the inverse-correlation hypothesis. The Naira, for example, has been in free fall for the past two years, implying that it has become more affordable. Capital importation, on the other hand, has not improved in tandem. Capital imports fell by 60% last year, from $24 billion in 2019 to $9.7 billion. COVID-19, of course, is a factor. However, even with perceived currency depreciation, a few other African countries have improved or seen less depreciation.
Furthermore, with currency depreciation, Nigeria’s inflation, which is currently at 16.63 percent, could worsen. Many argue that this stifles local capability, promotes unemployment, and escalates the poverty rate. As a result, it is not surprising that Vice President Yemi Osinbajo’s devaluation proposal is met with scepticism.
According to some experts, pursuing aggressive foreign exchange liberalisation rather than continuing administrative devaluation, which has traditionally widened the arbitrage between the official and parallel markets and increased the tendency to rent-seeking, provides more hope.
“In my opinion, the naira should be traded in the same way that other commodities are exchanged. Its worth is determined by those who purchase and sell it on the open market. The CBN’s artificial valuation is not going to last. The slow depreciation that we’ve witnessed is a waste of time. In the absence of a market rate for the naira, the economy suffers a value loss. Those who oppose allowing the naira’s market value to emerge are either profiting from the circumstance or lack sufficient knowledge on the matter. Float the naira now, and it will rediscover its value in six months,” says Victor Ogiemwonyi, a retired investment banker.
According to David Adonri of High Cap Securities Limited, a “primitive structure” is at the root of the protracted currency crisis, which has allowed for systemic allocative inefficiency.
To solve the entrenched difficulties, he says a transparent market-led mechanism is essential. In his words, Adonri, praises Osinbajo for his “pragmatic thinking”, “A transparent market mechanism must be used to restore allocative efficiency, allowing the naira to easily find its genuine value. The CBN, government agencies, and private currency users can purchase and sell at open market rates here. The CBN could work with exchanges to establish such platforms. Fiscal measures may be used to regulate imports to reduce the disparities that the market can produce.”