Creating demand for the naira

A national currency is one of the defining symbols of a country’s sovereignty. It should be the pride of a nation, with its strength and purchasing power carefully guarded. The acceptability of a national currency as legal tender has vast economic implications, affecting everything from market stability to global perception.

In a recent conversation with my friend and market colleague, Mr Sonnie Babatunde Ayere, he reminded me of the inherent meaning in the word “currency”—implying the flow of energy in economic activities tied to a country’s monetary system. According to him, the more business activity conducted in a national currency, the greater the demand for it, which ultimately enhances its value. He pointed out a stark truth: when the primary export of a country is not sold in its local currency, the currency is doomed. The consistent depreciation of the naira, regardless of the level of reserves or import cover, underscores this reality.

During our discussion, the topic of the naira’s value arose. Mr. Ayere argued that selling Nigeria’s oil in naira could be a game-changer. Why shouldn’t oil traders such as Vitol and Trafigura exchange their dollars for naira in Nigeria’s FX market to pay NNPC Limited for oil in naira? NNPC, now a private Nigerian company, should legally accept naira for its products. Furthermore, the recent commissioning of the Dangote Refinery presents a golden opportunity to sell oil to it in naira, completing the cycle by pricing all Nigerian oil in naira.

This proposal aligns with a position once championed by Mr Femi Falana SAN, who in 2023 decried the dollarization of transactions within Nigeria. More recently, a bill under consideration in the National Assembly seeks to ban dollar-denominated transactions in Nigeria. However, such a law may prove unnecessary if the naira achieves a market-based value. Laws to ban practices as nebulous as this are difficult to enforce and may drain resources better spent fostering economic stability.

The push to make the naira the exclusive currency for transactions in the Nigerian economy is grounded in sound economic reasoning. Selling oil in naira could stabilise the currency by forcing foreign buyers to convert their dollars to naira, thereby creating consistent demand. This shift would move Nigeria away from its current preoccupation with increasing dollar supply and toward strategies that generate demand for the naira.

 “The consistent depreciation of the naira, regardless of the level of reserves or import cover, underscores this reality.”

Nigeria’s economic challenges stem partly from its dependence on imports and limited capacity to generate dollar revenue from exports. While reducing import dependence will take years, an immediate focus on creating demand for the naira can uplift its value. Oil, as Nigeria’s primary export, offers a quick and effective way to enhance the naira’s value.

The government’s decision to sell crude oil to the Dangote Refinery in naira is a commendable step in the right direction. This move eliminates nearly 60% of Nigeria’s FX demand for refined petroleum imports, significantly reducing pressure on the naira. If stakeholders could also shift focus away from importing substandard fuel under the guise of competition, further gains could be realised.

Additionally, it is crucial to wean NNPC off its reliance on borrowing dollars through crude oil swaps, a practice that undermines Nigeria’s capacity to supply crude oil to local refineries. The paradox of importing crude oil to refine locally, despite having the capacity to process Nigerian crude, must be addressed to save FX and strengthen the naira.

Countries such as Kenya provide a compelling example of valuing their national currency. In Kenya, even taxi drivers insist on being paid in Kenyan shillings rather than dollars. Similarly, in global markets like the UK, Germany, and Japan, transactions are conducted in local currencies, underscoring the importance of safeguarding monetary sovereignty.

The current practice of funding Nigeria’s government budget by selling oil in dollars and converting it to naira for allocation at FAAC undermines the currency’s value. Instead, selling oil directly in naira would create daily demand for large quantities of the currency, eventually leading to naira scarcity and a corresponding appreciation in its value.

Russia’s recent policy of selling its oil exclusively in rubles illustrates the potential benefits of this approach. Despite crippling sanctions, the ruble has remained stable and even strengthened in some respects. Nigeria could achieve similar results by pricing all contracts and transactions in naira, leveraging its market price to create a robust FX market.

Imagine the transformative impact of selling 2 million barrels of oil daily in naira. At a market rate of ₦1,500 per barrel, this would generate daily demand for ₦30 billion, translating to a $2 billion inflow. Such consistent activity would significantly boost dollar liquidity, stabilise the naira, and enhance Nigeria’s economic outlook.

While oil is conventionally priced in dollars, Nigeria can sell in dollars but receive payments in naira. This would compel oil buyers to source naira from the Nigerian FX market, creating a true price discovery mechanism for the currency. Such a system would elevate the naira’s status, making it more visible and tradable internationally.

The time has come for Nigeria to prioritise its national currency, leveraging oil as a strategic asset to boost the naira’s value. A deliberate shift in this direction promises not only to stabilise the naira but also to promote economic growth and resilience, paving the way for a stronger and more self-reliant Nigeria.

Victor Ogiemwonyi is a retired Investment Banker and writes from Ikoyi, Lagos.