Naira's race to bottom erases cheer on independence day

Going as far back as the initial years after Nigeria gained independence, the relationship between the naira and foreign currencies, particularly the US dollar has been turbulent and volatile.

In 1973, when naira was introduced as a legal tender to replace the British Pound in the country, you needed less than one naira (N0.62) to buy a dollar at Nigeria’s official foreign exchange (FX) market.
Fast forward to over a decade and the naira was unrecognisable.

In September 1986, the Second-Tier Foreign Exchange Market (SFEM) was introduced as part of a series of IMF-mandated reforms during President Ibrahim Babangida’s tenure.

By the end of Babangida’s presidency in 1993, the naira, which hovered around 90 kobo per dollar in the 1970s and early 1980s, had depreciated significantly to 17 naira to $1. It was during this period that the concept of bureaux de change was introduced.

The rapid depreciation of the naira during these years led to a perception that a strong currency was synonymous with a robust economy. Unfortunately, the expected industrialization from a weaker exchange rate did not materialize.

During Sani Abacha’s regime, the official exchange rate of the naira remained fixed at 22 naira to $1 for his entire five-year term. However, maintaining this rate was challenging due to limited availability of dollars, especially as oil prices hovered below $20 per barrel during this period. This rigid exchange rate gave rise to the black market for foreign exchange, where the naira was traded at rates as high as 88 naira to $1.
To circumvent the official rate, banks engaged in creative practices, such as inflating forex requests and blending official and black market rates. This period saw the emergence of banking fortunes, and the arbitrage opportunities were lucrative.

Joseph Sanusi introduced the Interbank Foreign Exchange Market (IFEM) during his tenure as CBN governor. Due to dwindling foreign reserves and mounting foreign debt, maintaining the unrealistic official rate of 22 naira to $1 was unsustainable. Within a year, the naira depreciated to 85 naira, with the black market rate closely trailing at 105 naira to $1.
Sanusi’s attempts to control the exchange rate led to various financial maneuvers, including banks selling forex above the CBN rate and engaging in round-tripping. Forex round tripping became a lucrative business, with numerous banks taking part.

Starting in late 2003, oil prices began to rise steadily, reaching $140 per barrel by 2008. Nigeria also received $18 billion in debt relief from the Paris Club during this period, resulting in substantial foreign reserves.
Charles Soludo leveraged this windfall to harmonize Nigeria’s multiple exchange rates, allowing for more flexibility in forex requests. He expanded the range of eligible expenses, including medical and credit card bills. Consequently, the different exchange rates converged, and the naira strengthened by approximately 20% against the dollar.
However, as oil prices began to fall in late 2008, Soludo artificially created a forex scarcity, leading to a naira devaluation. Although the naira initially depreciated to 147 naira to $1, it eventually recovered as oil prices rebounded.
Sanusi Lamido Sanusi faced a challenge of maintaining naira stability despite high oil prices, as Nigeria struggled to accumulate reserves. To attract foreign investment, he removed the one-year restriction on foreign investors buying government bonds. This led to an influx of “hot money,” causing temporary instability.
Sanusi’s measures brought some stability, with the naira trading at 164 naira to the dollar when he left office in 2014.

Enter Godwin Emefiele, who unsuccessfully attempted to control dollar demand to save the naira which had come under severe pressure due to falling oil prices. Emefiele banned the Interbank forex market and also banned 43 items from being eligible for forex, directly undoing what Soludo did, on his way to overseeing the naira’s plunge to N460/$. Emefiele has since resigned and paved the way for the appointment of Olayemi Cardoso, as new CBN governor this September.

Today, a dollar sells for nearly N780 on the streets, following a big currency devaluation in June as new President Bola Tinubu attempts to fix the country’s foreign currency shortage.
The naira depreciation since inception has been attributed to inflation, economic mismanagement, and corruption, according to analysts.
“Demand for FX is higher than supply and as long as this continues it will keep getting weaker on the parallel,” said Yemi Kale, partner & chief economist, KPMG Nigeria.

He said the weakening in the official market will depend on the CBN policy to either prevent it from declining by force or allowing it to be determined fully by market forces in which case it will follow the trend in the parallel market.

Cardoso said his immediate priority would be to work out ways to aggressively offset huge FX obligations as part of measures to attack the current naira downturn which has become a huge burden for the economy.

Muda Yusuf, chief executive officer of the Centre for the Promotion of Private Enterprise, said restoring confidence in the FX market is the most urgent task before the new CBN Governor.

“Cardoso is assuming the leadership of the CBN at a very crucial time in our economic history. There is a serious confidence crisis in the foreign exchange market fueling an unprecedented speculative onslaught on the naira,” he said.

Yusuf said the economy is grappling with severe adverse effects of depreciating exchange rate, soaring energy costs, ravaging inflationary pressures, huge backlog of foreign exchange obligations that needs to be cleared and debt service obligations that need to be redeemed.
“Sadly, these outcomes are manifesting at a time when the country’s foreign reserves have been substantially encumbered,” he added.
During the screening exercise at the National Assembly, Cardoso outlined immediate or short term measures towards addressing the problem of naira free-fall.

The measures he mentioned would range from short to medium term as he responded to questions raised while being screened for confirmation by the Senate alongside other nominated deputy governors.
Cardoso said the second immediate measure would be to drive an open, transparent, ruled-based system.