The Nigerian naira has a tumultuous history marked by fluctuations, devaluations, and economic challenges. Since its introduction in 1973 to replace the pound, the naira has faced numerous obstacles that have contributed to its decline in value. Initially pegged to the British pound and later to the U.S. dollar, the naira’s exchange rate stability was eroded by factors such as political instability, corruption, mismanagement of resources, and external economic shocks.
One significant event in the history of the naira was the structural adjustment programs of the 1980s, which led to devaluations and a shift towards a more market-driven exchange rate system. Subsequent years saw further devaluations as Nigeria struggled with inflation, low oil prices, and foreign exchange shortages.
The country’s heavy reliance on oil exports made it vulnerable to fluctuations in global oil prices, impacting its foreign exchange reserves and the value of the naira. Efforts to stabilize the naira have included interventions by the Central Bank of Nigeria through policies like multiple exchange rates, capital controls, and forex restrictions. Despite these measures, the naira has continued to face challenges due to structural issues in the economy. Addressing these underlying issues will be crucial for restoring confidence in the naira and ensuring its stability in the future.
What factors are driving the Nigerian naira to reach historic lows?
The Nigerian naira is facing significant challenges that have led to its decline to record lows. Here are some key factors contributing to this situation:
- Foreign Currency Backlog: Nigeria has a substantial backlog of accumulated forex demand on the official market, forcing individuals and businesses to resort to the black market for dollars.
- Declining Dollar Flows: Dollar flows to Nigeria have decreased due to declining investment and lower exports of crude oil, which make up over 90% of the country’s export income.
- Forex Reserves Depletion: Nigeria’s forex reserves have decreased, falling to $33.5 billion in September from $37 billion in January, with a significant portion committed in derivatives, reducing the liquid amount available.
- Forex Forward Agreements: There is nearly $7 billion in forex forwards that are past due in Nigeria, affecting corporates’ ability to access new letters of credit and creating challenges for banks.
- Central Bank Policies: The removal of foreign currency controls by President Bola Tinubu aimed to unify exchange rates but has not yet improved access to foreign currency, contributing to the naira’s weakness and inflationary pressures.
- Market Speculation: The naira’s value is influenced by market speculation and factors like interest rate hikes, with recent jumbo rate hikes potentially stabilizing the currency.
- Economic Instability: The naira’s sharp decline has raised concerns about inflation, interest rates, and the overall economic outlook for Nigeria.
History of Fall of Naira
Efforts by the Central Bank of Nigeria, such as interest rate adjustments and measures to improve dollar supply, aim to stabilize the naira and attract foreign investment. However, challenges persist, and the future trajectory of the naira remains uncertain amidst ongoing economic pressures.
| Era | Time Period | Key Events and Policies | Exchange Rate Impact |
|---|---|---|---|
| Babangida | 1986-1993 | – Introduction of SFEM – Naira devaluation – Allowance of parallel market | – Naira crashed from 0.89 to 17/$ |
| Abacha | 1993-1998 | – Fixed official rate at 22/$ – Integration of black market | – Parallel rate reached 88/$ |
| Sanusi | 1999-2004 | – Establishment of IFEM – Implementation of managed float system | – Naira declined to 85/$ |
| Soludo | 2004-2009 | – Exchange rate harmonization – Benefit from oil boom | – Naira rose to 115/$ in 2008 |
| Sanusi Lamido Sanusi | 2009-2014 | – Volatile capital flows – Relative stability | – Naira hovered around 164/$ |
| Emefiele (First Term) | 2014-2019 | – Forex restrictions – Implementation of multiple exchange rates | – Naira plummeted to over 500/$ |
| Emefiele (Second Term) | 2019-2024 | – Exchange rate unification – Adoption of I&E window rate | – Naira stabilized around 380/$ |
Nigeria’s Turbulent Foreign Exchange Journey: 1986 to 2024
Over the past four decades, Nigeria’s management of its foreign exchange policy has been a rollercoaster ride driven by oil booms and busts, external shocks, regime changes and shifting ideologies. As of February 2024, the naira’s exchange rate remains a highly politicized and emotive issue, reflecting the country’s failure to achieve macroeconomic stability despite multiple regime changes.
1986-1993: Babangida and the SAP Era
In 1986, confronted by plunging oil revenues, mounting debt and an economic crisis, the military regime of General Ibrahim Babangida accepted an IMF structural adjustment program (SAP). This included the introduction of a Second-tier Foreign Exchange Market (SFEM) which floated the naira. The currency swiftly crashed from 0.89 to the dollar historically to 9 naira by 1987. This accelerated devaluation left lasting public trauma about preserving a ‘strong’ naira.Babangida also opened up the forex system by licensing bureaux de change. But the promised benefits of a weaker currency did not materialize. As devaluation triggered inflation and hardship, the government backtracked on reforms. But the genie was out of the bottle – the naira was overvalued.
1993-1998: Abacha’s Rigidity and the Black Market
General Sani Abacha’s military dictatorship from 1993-1998 notoriously fixed the naira at 22 to the dollar despite depressed oil prices and dwindling reserves. The Autonomous Foreign Exchange Market (AFEM) was introduced in 1995 for limited Central Bank sales to end users but failed to curb the parallel market. The black market boomed as the naira hit 88 per dollar while the official rate remained frozen. Authorized dealers exploited arbitrage opportunities through round-tripping, making huge profits. The corrupt and dysfunctional system incentivized graft.
1999-2004: Managed Float and Distortions under Sanusi
Democracy’s return in 1999 brought banking veteran Joseph Sanusi as Central Bank governor with a mandate for reforms. He abolished AFEM and set up the Inter-bank Foreign Exchange Market (IFEM) for market determined exchange rates. But the naira came under constant downward pressure. Sanusi frequently reversed course, banning IFEM for months and imposing restrictions to defend the naira. The managed float produced mixed results – it narrowed the gap between official and parallel rates but also created distortions that banks exploited. Games like round tripping of oil receipts persisted.
2004-2009: Temporary Respite during Soludo’s Oil Boom
Charles Soludo’s tenure as Central Bank governor from 2004-2009 benefited from surging oil prices touching $140 per barrel in 2008. He unified the multiple exchange rates and implemented far reaching liberalization. The reforms succeeded briefly – the naira rose against the dollar as reserves exceeded $62 billion. But Soludo failed to capitalize on the windfall to diversify Nigeria’s oil dependent economy. When oil prices crashed in 2008, he was forced to devalue the naira by 20% and re-impose controls. The lessons were clear – Nigeria remained vulnerable to external shocks due to lack of savings and diversification.
2009-2014: Volatile Capital Flows and Policy Conflicts under Sanusi
Sanusi Lamido Sanusi, Soludo’s successor, reopened the Interbank forex market when oil prices recovered after the 2008 global financial crisis. But higher oil earnings did not boost reserves due to graft and leakages. To attract forex inflows, he lifted restrictions on foreign portfolio investors. This hot money in turn caused asset bubbles and exchange rate volatility whenever sentiment turned. Sanusi’s capital control flip-flops caused policy uncertainty. His measures failed to stabilize reserves despite high oil prices during his tenure.
2014-2019: Currency Crisis and Recession under Emefiele
Godwin Emefiele’s first term as Central Bank governor from 2014-2019 was dominated by oil crashing from over $100 to around $50 per barrel. With Nigeria’s economy exposed, he imposed demand management and capital controls to defend the naira. But falling reserves overwhelmed Emefiele’s controls. The naira plunged while inflation and unemployment soared, culminating in a recession in 2016-2017. Emefiele drew criticism for defending the naira at all costs despite weak fundamentals and distorting the economy.
2019-2023 Partial Reforms under Emefiele
Emefiele’s second term has seen him implement partial reforms. He unified the multiple exchange rates around the Investors and Exporters window which became the official rate. Some forex restrictions were eased but the naira remained tightly managed. By 2024, the naira had stabilized around 380 per dollar but multiple challenges persist, including fuel subsidy costs, stalled privatization, limited non-oil exports and unstable capital flows. Emefiele scored modest successes but forex policy remains unpredictable.
After 40 years of convoluted forex journey, Nigeria’s key lessons are clear:
- Failure to diversify the oil dependent economy magnifies external shocks.
- Lack of savings and buffers during periods of high oil prices makes the economy more vulnerable.
- Artificially fixing the naira absent economic fundamentals causes distortions.
- Allowing market forces determine exchange rates reduces distortions and aids stability.
- Policy flip-flops and capital controls encourage speculation and graft.
- Political interference and conflicting objectives hamper Central Bank independence and effectiveness.
As of February 2024, Nigeria’s unresolved forex crisis is a symptom of its failure to break from the mistakes of the past. Genuine reform requires the political will to embrace pragmatism over populist shortcuts. The country remains hostage to the power and trauma of the exchange rate debate. Fundamental diversification of the economy and export base holds the key to permanent stability and prosperity.