The most effective indicator for measuring and evaluating the state of a country’s economy apart from GDP is the currency of a nation. Most countries of the world keep their foreign exchange reserve in dollar. United States dollar is the global currency of transaction and business dealings due to its effectiveness in retention of value and it’s readily convertibility.
Nigeria has the ambition and desire to join G20 countries but all of these countries have reasonably managed their currencies. United States and countries of G20 countries with comparative stable currencies still use their lower currency denominations unlike Nigeria.
US Dollar did not become the dominant, primary and global reserve currency out of affinity for United States but for its ability to maintain its value, stability and durability. Therefore why Nigeria with oil as its major source of foreign exchange could not retain its smaller currency denominations of 1kobo, 25kobo, 5 Naira etc?
With this prelude let’s evaluate and analyze the present state of naira. There was once upon a time in Nigeria, when smaller naira denominations including one kobo, 5 kobo, 25 kobo, N1 naira, N5 naira were in circulation, used for business transactions. What happened to them? Can Sanusi’s CBN and its monetary committee enlighten Nigerians on what happened to our smaller currency denominations?
Let’s be logical and serious here, everybody knows that inflation and devaluation brought about the vanishing of kobo and smaller naira denominations. It is so sad that Nigerians of younger generation have never seen one kobo or five naira note.
Devaluation may be the greatest threat to the value of naira as Honourable Odebunmi Olusegun Dokun, Lawmaker Nigeria House of Representatives rightfully noted: “a critical look at these last few years, taking the US Dollar as a basis for comparison shows that around 1990 to 1993, it was about N28 to a Dollar; around 1994 to 1996, it was about N40 to a Dollar; around 1996 to 1999, it was about N80 to a Dollar; around 1999 to 2007, it was about N140 to a Dollar; and around 2007 to date, it is about N158 to a Dollar. This has shown that a continuous devaluation in Naira without any improvement, and if this downward trend persists, it will affect Nigeria’s economy and the future of the nation in general.”
In case of inflation, the monetary and fiscal policy makers failed the country. The country in 1970s and 80s were spending excessively. The governors of Central Bank of Nigeria of those years were poor guardian of monetary policy with limited knowledge on how to maintain price stability and healthy macroeconomics immovability. Instead of them to be mopping liquidity, they open water tap of liquidity to overflow the monetary base. By so doing, inflationary trend escalates and value of naira commenced to depreciate.
Another heavy blow to naira was when the International Monetary Fund (IMF) compelled Nigeria to devalue her currency in the so-called structural adjustment program, a mechanistic policy that brought the massive devaluation and subsequent fall of naira.
Therefore in the last week IMF assessment of Nigeria’s liquidity management, I was not surprise on the analysis by the IMF assessors. Let me make this clear, I still hold IMF in high esteem. But when it comes to devaluation and shock therapy that were administered by IMF to struggling economies, I will part way from the respectable institute.
Liquidity management assessed by IMF on Central Bank of Nigeria was right on the money. It highlighted the inflow of the revenue from oil export into the economy and its volatility. Excessive liquidity and overspending were underlined as detrimental and overbearing to the economy:
“In Nigeria, structural liquidity is more likely to be volatile over time for various reasons. Oil receipts and related foreign exchanges sales of oil companies are expected to remain strong, given high oil prices and large proven reserves for oil and gas, and volatile. The lumpy nature of the disbursements from the Federation Account is also important factor for variation in liquidity. Given that the surplus liquidity is probably more related to foreign exchange inflows during oil booms, one might argue for more sales of foreign exchange and less issuance of domestic debt. The result should be a slightly strong naira and slightly lower interest rates. In this volatile environment, there is an on-going challenge to manage systemic liquidity consistent with the announced policy stance. To align systemic liquidity with the policy stance, the adjustment measures should be based on medium-term forecasts of banking system liquidity. The CBN also needs to recognize the trade-off in sterilizing a unit of spending from oil receipts: cost is either in terms of higher interest rates if used Open Market Operations (OMOs) or an appreciated exchange rate if foreign exchange sales are applied. In either case there is likely to be a cost to the tradable sector of the economy. The goal should be to seek the ‘least cost’ mix of sterilization.”
Nigeria‘s earlier whopped and lopsided fiscal and monetary policies contributed to the fall and unravel of naira.There was no urgent need for the herculean devaluation of naira to appease IMF in the 80s because the country did not have arrays of products to export in order to enjoy the advantage of lesser strong currency from competitive global market. Nigeria has oil to export even with the artificial oil glut in the 1980s, the higher price of oil was bound to reemerge due to the rising demand from China and India.
But the then Nigerian policy makers and governing financial leaders were impatient and could not have the courage and patriotic instinct to say no to the masterly IMF. The big house and power of international financial institutions including World Bank , Paris Club, London Club and of course IMF intimidated and overwhelmed Nigeria chieftains that probably lacked the intellectual and pragmatic capability to defend the emerging naira. The naira was not protected and it gradually and steadily loss its value and strength as a consistent medium of exchange for Nigerians.
In spite of the recorded achievements of Sanusi’s CBN particularly the banking reform and capitalization there were also excessive and pitfalls that were also acknowledged by IMF in the recent report, because “despite improvements in liquidity management framework, markets appeared, at times, confused about the signals sent from use of specific instruments. For example, in October 2011, the CBN responded to pressures on the currency and prices by hiking the MPR by 275 bps and doubling the CRR to 8 percent. Then, the CBN immediately reversed the impact of these measures by purchasing nearly two trillion of the Assets Management Corporation of Nigeria (AMCON) bonds and thereby injecting substantial liquidity in the intervened banks.”
Histories of currencies have revealed that many countries have managed to loss values of their currencies through hyperinflation, devaluation and mismanagement that ultimately weaken their currencies.
Weimar Republic and present day Zimbabwe government were prime examples of nations that hyperinflation took away their currencies market integrity. These might be extreme examples for Nigeria which is still far away from the given scenarios. But it is logical and sensible to buttress these experiences inorder to show that the road is not worth traveling and those experiences are not necessarily far-fetched.
Emeka Chiakwelu, Principal Policy Strategist at AFRIPOL. His works have appeared in Wall Street Journal, Huffington Post, Forbes and many other important journals around the world. His writings have also been cited in many economic books, publications and many institutions of higher learning including tagteam Harvard Education.
Written By Emeka Chiakwelu
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