Decline and fall of the naira

Money is a public good, defined as that class of commodities or services that freely benefits all members of society. Money fulfils three economic functions: a unit of account, a store of value and a vehicle for facilitating transactions. It is also a national symbol — an embodiment of a country’s honour and prestige.

The CBN was established on 1st July 1959, at the eve of departure of the colonialists. The Nigerian pound (N£) replaced the old West African shilling. During the postwar era, Nigeria decided to replace the British imperial system of weights and measures with the continental metric system. In January 1973, the naira replaced the Nigerian pound, at the rate of N1 to UK10 shillings. The Bank of England ceased to be guarantor of our legal tender currency. Britain itself was shedding off her Commonwealth Trade Preference System as it prepared to join the European Common Market. That successful transition was managed by finance minister Obafemi Awolowo who also coined the term “naira”.

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Ever since the Bretton Woods settlement of 1944, the dollar has been the world’s reserve currency. The dollar was fixed at parity with gold at the rate of $35 to 1 ounce of gold, until 1971, when, due to balance of payments constraints, President Nixon unilaterally revoked the gold-dollar exchange system. Ever since, the international monetary order has been governed by a system of floating currencies. In 1973, Secretary of State Henry Kissinger reached an agreement with the House of Saud, whereby, in exchange for American military protection, the dollar would have sole monopoly as the currency for international oil trading. For better or worse, the dollar has heretofore remained the key anchor and benchmark for our naira.

In 1973, our new naira exchanged at N1 to $0.62. The Babangida military dictatorship marked a turning point. Naira suffered a massive devaluation, exchanging at $1.75 to the naira in 1986. The neoliberal structural adjustment policies that the regime pursued under the tutelage of the IMF/WB saw the naira fall to N22 to the dollar by 1994. When Goodluck Jonathan handed over power to Muhammadu Buhari in May 2015, the naira exchanged at N198.914 to $1. By 2018, it fell further to N306.08. The spendthrift profligacy, monumental incompetence and grand larceny of the regime have virtually destroyed the naira. By May 2019, the naira exchanged at N360 to $1. Today, it exchanges for N520 for the US$ in the parallel market.

The value of a national currency is shaped by several factors.

First, inflation. In 2021, headline inflation stands at nearly 18 per cent. The American economist Murray Rothbard notes that, “inflation not only raises prices and destroys the value of the currency unit; it also acts as a giant system of expropriation”. Inflation is not only a tax on the poor; it discourages savings and investments while weakening the domestic currency.

Second, the current account balance — the total number of international trade transactions (imports, exports and debts) — is crucial. A positive account bolsters the exchange rate while a negative one weakens it. At year’s end 2021, the ratio of our current account balance to GDP is projected to be -2.70 per cent. When a country has to spend its dwindling foreign exchange in settling payments for its imports, its currency depreciates.

Third, debt. Nigeria’s current debt stands at a staggering N33 trillion ($87 billion), amounting to 35% of GDP. This year alone, we are projected to spend more than 90% of government revenues on debt-servicing. High debts will further weaken the naira.

Fourth, the terms of trade — the ratio of export prices to import prices. If the prices of our exports are rising faster than those of our imports, it enhances our currency value. Unfortunately for us, the reverse is the case. Global oil prices have been heading south while prices of advanced-country industrial manufactures have been heading north.

Fifth, economic recession. Nigeria has seen two major recessions in 5 years. Recession undermines public finances while dampening overall business confidence and further crippling the naira.

Sixth, political instability. Nigeria has virtually been at war with itself for the better part of a decade; worsened by a regime inspired by bad faith, nepotism and exclusion. This is fostering geopolitical tensions, youth rebellion and ethnic demands for self-determination. The naira and the economy are the worst for it.

Seventh, currency speculation. Due to geopolitical uncertainty, capital is taking flight to zones of safety. Africa’s richest man, Aliko Dangote, recently announced that he is shifting 60% of his investments to New York. Nigerians are offloading naira and storing their assets in dollars, further depressing our currency.

Eighth, dollarisation, a phenomenon in which the dollar replaces the local currency as a store of value and medium of exchange. The CBN has issued directives against invoicing in dollars. But they are only obeyed in the breach. Landlords in high-end districts and high prestige international schools are invoicing in dollars rather than naira. Our so-called “big men” do business in dollars more than naira. Dollarisation weakens the naira.

Ninth, poor monetary policies. The CBN, in our view, has fallen prey to political capture by vested interests. Monetary authorities lose policy credibility when their policies are driven by private interests rather than the common good. CBN has departed from its core mandate and is pursuing chimeras. Its trillion naira “interventions” have never been independently evaluated for us to ascertain if the medicine has not been more costly than the malady it aims to cure. Lack of policy credibility depresses our naira.

Finally, political leadership. The lexicographer Daniel Webster declared long ago that “a disordered currency is one of the greatest political evils”. A positive karma bolsters a national currency while a negative one destroys its standing.

The Russian Bolshevik revolutionary leader, V. I. Lenin declared that “the best way to destroy the capitalist economy is to debauch the currency”. I would say that the best way to debauch a currency is to let your central bank run aground.