The Naira: Revaluation or Redomination, Part 1
Posted August 26, 2007 · Ejike Okpa II
In the anal of currency fluctuation, no currency in its less than 40 years life has tumbled like the Naira. In early 1970s, when Nigeria was on its way to redefine itself and separate from its colonial currency ‘the pound’, Naira emerged. Its emergence created high feelings of national pride because Nigerians felt they finally waned themselves from their colonial masters. But waning may be physical. However, the organic nature of the naira as the currency of the world’s most populous black nation, met undue challenges. For a while, the naira appeared to stand firm against the dollar and the pound sterling. The naira held such promise that in 1985, exactly 22 years this month when I left Nigeria for US, I paid N698.50 for a flight from Lagos to Dallas. At then exchange rate against the dollar, such naira amount fetched about $1,270. Today, a similar flight will cost a Nigerian about N230,000 and in dollar terms about $1,700. So in 22 years, the cost of the flight has changed by 34% or 1.54% per year in dollar terms but the naira change has been about 15% annually or 328%; an erosion of value.
The planned revaluation, which will put the naira at about N1.25 to the dollar, is to get the Naira ready as the currency of choice for the proposed and airy West Africa’s common currency by 2009. The policy approach is more a voo-doo econometrics similar to rent control and or price fixing. Assuming the policy were to succeed, exporters to Nigeria will drastically increase the price of their goods because there is no corresponding goods to be purchased in Nigeria with the earned income except buying back oil, which will hurt Nigeria’s economy.
There are various factors that tend to affect the value of any currency. There has been considerable debate concerning the optimal degree of independence which should be provided as control of monetary policy. In many developing countries there is the continuing debate as to how they should structure their central bank to provide the optimal monetary policy to attain the highest possible well being for the citizens. In attaining this level, some central bank have sought to engage in fixed rate exchange rate; more like rent control or engage in parallel rates to satisfy government currency needs and market needs. While such may have short term benefits, the best approach to enhance the convertibility and stability of any currency is to allow the forces of the market to determine its value.
The policy machination by Nigeria’s Central Bank Governor Mr. Soludo, is more an attempt to price control the value of the naira. Such a control will deepen the naira value because as it stands, there is very little backing to the naira. The value of any local currency is strengthened against its competition when the purchasing power/value is measured with local goods and services. Because the needs of the average Nigerian is met by goods imported into the country, the naira is weak against currencies such as the dollar, pound or Euro because outside of the oil, there is very limited goods that Nigeria exports that are purchased in naira. With oil revenue contributing a disproportionate share of the foreign exchange earnings of the country; about 80%, the naira is bound to fluctuate at very wide margins except the country has large enough foreign exchange reserve to shore up the fluctuation.
What the government should do to stabilize the naira is insist that investment in the oil sector is done in naira and that a good portion of the initial investment in oil exploration and development is done in naira. By embarking on this avenue, the naira will appreciate because of the benefit of ‘return of’ and ‘return on’ of invested capital. Since the multinationals bring their capital and demand repay back in their currency, the local naira is only used for operation. Instead of embarking on naira price fixing and or pegging the naira at a given rate, what the policy should strive to do is increase and enhance local manufacturing and productivity volumes to a level that the average Nigerian can depend on local manufactured and produced goods to live. Then attempt should made to stabilize the price of government contracts [often over priced and valued], and begin pegging the interest rate charged by banks on loans going to certain key sectors to be in single digits.
The naira will not be able to sustain its value if locally it cannot be used to meet the daily needs of Nigerians. The dollar is the only currency whose value is backed by the full faith of US government and in ‘God We Trust’. Other currencies peg their value to either the value of their foreign reserve and or gold bullion. The naira does not enjoy the full faith and backing of the federal government, and even if it does, such full faith is seen as non-collateral. There is limited foreign reserve to back the naira value because the import volume is more than the naira can sustain.
Email to Friend | View Blog Archive
I happen to have read Soludo’s proposed Naira redenomination policy. What you have proposed in this humble entry makes way more sense!
Rudimentary economics and common sense tell us that we cannot assign value to currencies by unilateral acts of fiat such as dropping zeroes/moving decimal points, etc.
On the other hand, perhaps I am yet uninitiated in the mystical arts of currency redenomination/revaluation. Surely, our PhD of a central bank governor must know what he’s doing.
Added by Charles Oyibo on Aug 26 at 02:45 PM