“From an exchange rate of about 1.5 dollars to the Nigeria currency at independence in 1960, our currency now exchanges at the rate of about 230 Naira to a dollar. While our currency exchanged at 1 Nigeria pound to a British pound, our naira now exchanges at about 350 naira to a pound. This must stop. Otherwise sooner than later our Naira may not be worth more than a toilet paper”.
Recently in the course of a visit to France, President Muhamadu Buhari is reported to have stated that there will be no further devaluation of the naira. The President is reported to have stated amongst others that:
“the naira has been devalued, as it used to be around N140/$ and now it is hovering around N200/$ and above”. Consequently… I don’t think it is healthy for us to have the Naira further devalued…we are therefore getting the Central Bank to make modifications in terms of foreign exchange availability for essential industries, spare parts, essential raw materials and so on, while liberal access to “CBN’s depleting forex reserves” will be denied to importers of such things like toothpick and rice for which Nigeria has adequate capacity”. The President therefore concluded that “we don’t need to give our hard earned currency for that, but those who insist on toothpick from Europe or from China, instead of using Nigerian toothpick, they can go and source their (own) foreign exchange”.
To state that the President’s comments came as a huge relief to millions of Nigerians would be an understatement. Without a doubt, Nigerians have for long been groaning under the burden of constant devaluation of the naira with its attendant effects on their everyday livelihood. However, there are those who feel that the naira is overvalued and that there should be less governmental control in the matter. This debate has been on for a long time and from all indications will not go away in a hurry. From an exchange rate of about 1.5 dollars to the Nigeria currency at independence 1960, our currency now exchanges at the rate of about 230 Naira to a dollar. While our currency exchanged at 1 Nigeria pound to a British pound, our naira now exchanges at about 350 naira to a pound. This must stop. Otherwise sooner than later our Naira may not be worth more than a toilet paper. This is why I propose to examine the real issues surrounding the devaluation of the naira, its effects on the lives of Nigerians and how the government can through appropriate policy alleviate the current suffering of Nigerians and reposition the economy.
EFFECTS OF A STRONG NAIRA
It cannot be denied that the value of the currency of a state is of paramount importance to its survival. Whist I do not intend this to be a treatise on complex economic principles, it is pertinent to highlight the following benefits of a strong naira or indeed any currency;
- Lower inflation: A strong currency lowers the cost of imported goods, enabling lower prices for consumers. This leaves more money in their pockets for local expenditure.
- Lower costs for some exporters: those exporters that import raw materials from abroad in order to make their products, pay less for those materials. This offers some compensation for lower competition due to the stronger currency.
- Acquisition Opportunities: A company from a country with a strong currency can buy a similar company or a supplier, in a country that has a weak currency. This enables the buying company to enjoy the strong currency in order to lower costs.
- Low funding costs for governments: By having a strengthening currency, flows from outside the country often go into local government bonds. This flow can lower the yield and enable the country with the strong currency to raise money at cheaper rates in the markets.
- Sense of wealth: While rising stock prices and rising home values have a stronger wealth effect, also a stronger currency helps as citizens of a country with a strong currency find it cheaper to take vacations abroad, improving their quality of life.
STRENGHT OF NIGERIAN CURRENCY IN THE 60s
All the factors stated above were present in the Nigerian economy in the sixties when the Nigerian Pound was at par with the British Pound. This had a profoundly positive effect on the country and its citizens. However the discovery of Oil and the huge inflow of Oil revenue brought about a drastic change. Successive Nigerian governments failed to invest the revenue that was coming in from Oil. Such was the magnitude of the inflow of revenue the then Head of State remarked that Nigeria’s problem was not money but how to spend it. As I have stated earlier this led to expenditure which rather than help the growth of the economy, brought about immense strain on it. In no time therefore the Nigerian currency started to lose its value. Furthermore the Country which hitherto had been renowned for the exportation of produce such as rice, maize, wheat, sugar and other consumables became largely dependent on importation.
DEVALUATION BY THE MILITARY
Things however came to a head when the administration of General Ibrahim Babangida devalued the Naira in fulfillment of conditions imposed by the International Monetary Fund (IMF) for the grant of a loan facility to the country. Whilst economists agree that devaluation in some cases brings with it some advantages such as a fall in the price of exports and growths in domestic industry and employment, the devaluation done by the Babangida administration irreversibly put Nigeria on a course of economic regression the effects of which are still being felt today. Interestingly successive governments have failed to learn from the mistakes of the Babangida administration. Rather than pursue means of strengthening the economy and making it less dependent on oil revenue and the attendant risks, little or nothing was done in the area of diversification. Therefore when Oil prices started to tumble last year, we once again returned to what some consider to be the best way out; further devaluation of the Naira.
The problem with devaluation however is that the factors which ordinarily would make it serve as a stimulus for recovery are not present in Nigeria. As I stated earlier devaluation in normal situations would encourage exportation and bring about foreign interests in local industries. But in Nigeria the local manufacturing industry has for long been almost comatose having buckled under the strain of consistent failure of governments to provide much needed infrastructure such as power. Many factories have since closed down and in some instances relocated to other countries.
The satiation at hand today in which the Naira has lost much of its value is one that continues to affect Nigerians. The purchasing power of many has already been affected. As Muslims nationwide and their friends prepare for the coming Islamic holidays they will be confronted with the glaring effects of the devaluation of the naira.
To be continued…
AARE AFE BABALOLA SAN