The constant travails of Naira is only a replica of the strain of a pugnacious cancer ready to rip soul and body apart.

There have been many contraptions and analysis as regards the cause of the state of the naira.But all to no avail.

The economists in Nigeria have all gone to town with various exhaustive ideas on how to repair the currency which was voted the third worse currency in the world last years.

 

But ideas and talks have been very cheap in stemming this tide.somebody once quipped the way the Nigeria is falling makes London bridge look like a joke.As a proud Nigerian this hurts me a lot because I know the naira was once the pride of Nigeria

This table shows the historical antecedence of the Nigerian naira

This table shows the historical value of one U.S. Dollar in Nigerian naira – PM = Parallel Market.
Date Naira per US $ Date Naira per US $
1972 0.658
1973 0.658
1974 0.63
1975 0.616
1976 0.62
1977 0.647
1978 0.606
1979 0.596
1980 0.550 (0.900 PM)
1981 0.61
1982 0.673
1983 0.724
1984 0.765
1985 0.894 (1.70 PM)
1986 2.02 (3.90 PM)
1987 4.02 (5.90 PM)
1988 4.54 (6.70 PM)
1989 7.39 (10.70 PM)
1990 7.39 (10.70 PM)
1991 8.04 (9.30 PM)
1992 9.91
1993 17.30 (21.90 PM)
1994 22.33 (56.80 PM)
1995 21.89 (71.70 PM)
1996 21.89 (84.58 PM)
1997 21.89 (84.58 PM)
1998 21.89 (84.70 PM)
1999 21.89 (88-90 PM)
2000 85.98 (105.00 PM)
2001 99-106 (104-122 PM)
2002 109-113 (122-140 PM)
2003 114-127 (135-137 PM)
2004 127-130 (137-144 PM)
2005 132-136
2006 128.50-131.80
2007 120-125
2008 115.50-120
2009 145-171 and as we speak as at 31st January 2017 it peaked at 500 naira to 1 dollar.

We may want to ask what went wrong

A few answers

Dutch disease
The Dutch disease refers to the problems associated with a rapid increase in the production of raw materials causing a decline in other sectors of the economy. When the raw materials run out, the economy can be in a worse position than before.

If a country discovers substantial amounts of oil, gas or other natural commodity, it will begin to export these goods causing a substantial increase in GDP; this will improve tax revenues, improve the current account and create employment opportunities. But, often countries who discovered oil have gained much less than you might expect.

These are the likely economic effects of discovery oil / gas.

1. Appreciation in currency. Due to the discovery of oil and increase in exports, the country will see an appreciation in the exchange rate. This is because higher demand for exports lead to increased demand for Sterling. For example, in the late 1970s, the UK saw a rapid appreciation in Sterling after the discovery of North Sea oil.

2. Decline in competitiveness. The problem of this appreciation in the exchange rate is that other trade-able sectors of the economy will become uncompetitive. Manufacturing industries will see a substantial fall in demand, due to the higher exchange rate. Therefore, the economy will shift from manufacturing towards the primary sector. In the early 1980s, UK manufacturing output fell significantly as a result of the appreciation in the Pound.

3. Growth in luxury imports. Higher output of oil will enable those who benefit to spend on luxury goods and luxury services. These luxury goods tend to be imported meaning that domestic firms gain little benefit.

4. Growth in real wages. Due to the increased wealth and spending on services, there will be higher demand for service sector workers (waiters, hairdressers, chauffeurs e.t.c). This will cause rising real wages in the economy, causing another problem for manufacturing firms as they have to increase real wages to retain workers. This will further decrease competitiveness of manufacturing exports.

5. Indirect-deindustrialisation. With manufacturing becoming uncompetitive due to higher exchange rate and higher wages, output will fall, and there will be a decline in investment, leading to lower growth. These sectors will begin to lag behind other countries. It can be very difficult to catch up later.

5. Income inequality. Often the discovery of raw materials, such as oil benefits a relatively small percentage of the population. Those who own the oil fields can see huge wealth, but the benefits of oil and gas are often not equally distributed within society. Workers may benefit from rising real wages in the service sector, but the discovery of raw materials often creates a few billionaires, so the increase in GDP is often concentrated in the hands of a small number. In several developing economies, oil fields are developed by foreign multinationals, causing some of the wealth to be taken away from the country.

And in curbing this you need to do the following

Limit the rise in the real exchange rate. For example, China limited it’s real exchange rate by purchasing US bonds to keep the value of the relatively Yuan lower.
Reduce foreign capital flows. If a country moved from a budget deficit to a budget surplus, it would attract less foreign investment to purchase the government bonds. Lower capital inflows would limit the rise in the exchange rate.
Spend proceeds of oil revenue on infrastructure and education. The government could earmark taxes from oil to be spent on improving the infrastructure of an economy – better public transport, better education, subsidies for investing in technologies with positive externalities. All these can help improve the competitiveness of manufacturing export industries and help them deal with higher wages and higher exchange rate.
Immigration. Many oil rich economies have encouraged immigration to provide service sector jobs, this keeps real wage growth down.
Sovereign wealth funds. A sovereign wealth fund is a government saving scheme, where income from oil revenues is not spent but saved to give a future income stream. E.g. Government pension fund in Norway.
Greater equality of distribution. This paper at the World Bank states that the ‘Dutch Disease’ effect is worse when wealth is concentrated in the hands of a few billionaires – because there is marked increase in luxury goods and luxury services. Greater income distribution enables a more diverse economy.
Higher tax on luxury services and luxury imports. This would prevent the economy becoming too skewed towards a luxury services which may not be sustainable in the long-term.

 

Apart from this the various moribund economic policies of the successive government like the structural adjustment program

 

Under World Bank structural adjustment, the government tried to eliminate inefficient state intervention and obtain budgetary relief by abolishing agricultural commodity marketing boards and liberalizing cash-crop exports. These measures, together with devaluation, increased the naira prices of export crops, especially cocoa. The state also privatized many public enterprises by selling equity to private investors, while restructuring other parastatals to improve efficiency. The federal government encouraged private investment in the late 1980s, allowed foreign ownership in most manufacturing, and liberalized and accelerated administrative procedures for new investment.

The Babangida government, which came to power in August 1985 at a time of depressed oil prices, undertook its structural adjustment program between 1986 and 1988. In September 1986, the government introduced a second-tier foreign exchange market (SFEM), sold on auction for a near equilibrium price and used for export earnings and import trade requirements. Under SFEM, the naira depreciated 66 percent to N1=US$0.64 (N1.56=US$1), and declined further in value through July 1987, when the first and second tiers were merged. When adopting the SFEM, Nigeria abolished the ex-factory price controls set by the Prices, Productivity, and Incomes Board, as well as the 30 percent import surcharge and import licensing system. It reduced its import prohibition list substantially and promoted exports through fiscal and credit incentives and by allowing those selling abroad to retain foreign currency. Although this action opened the way for an IMF agreement and debt rescheduling, the military government declined to use an allocation of Special Drawing Rights (see Glossary) in IMF standby funds.

Meanwhile, the naira continued depreciating, especially after the relaxation of fiscal policy early in 1988. The effect of the SFEM in breaking bottlenecks, together with the slowing of food price increases, dampened inflation in 1986, but the easing of domestic restrictions in 1988 reignited it. Real interest rates were negative, and capital flight and speculative imports resumed. In 1989 the government again unified foreign exchange markets, depreciating–but not stabilizing–the naira and reducing the external deficit. Manufacturing firms increased their reliance on local inputs and raw materials, firms depending on domestic resources grew rapidly, and capacity utilization rose, although it was still below 50 percent. Concurrently, nonoil exports grew from US$200 million in 1986 to US$1,000 million in 1988. This amount, however, represented only 13 percent of export value at the level of the 1970s, and cash crops like cocoa dominated the export market. Large firms benefited from the foreign exchange auction and enjoyed higher capacity use than smaller ones. Despite dramatically reduced labor costs, domestic industrial firms undertook little investment or technological improvements.

Structural adjustment was accompanied by falling real wages, the redistribution of income from urban to rural areas, and reduced health, education, and social spending. The decrease in spending on social programs contributed to often vociferous domestic unrest, such as Muslim-Christian riots in Kaduna State in March 1987, urban rioting in April 1988 in response to reduced gasoline subsidies, student-led violence in opposition to government economic policies in May and June 1989, and the second coup attempt against General Babangida in April 1990.

As the naira slide continues all hands must be on deck to stop the progressive decline of the Naira.

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