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Currency devaluation: Root cause of Nigerian Economic woes

Nigeria is a middle-income, mixed economy and emerging market, with expanding manufacturing, financial, service, communications, technology and entertainment sectors. It is ranked as the 27th largest economy in the world in terms of nominal GDP, and the 22ndlargest in terms of purchasing power parity. It is the largest economy in Africa; its re-emergent manufacturing sector became the largest on the continent in 2013, and it produces a large proportion of goods and services for the West African subcontinent. In addition, the debt-to-GDP ratio is 11 percent, which is 8 percent below the 2012 ratio.

Structural Adjustment Programs (SAP) the evil

Currency devaluation leads to increase in output and improves the balance of payments but in the long run the monetary consequence of the devaluation ensures that the increase in output and improvement in the balance of payment is neutralized by the rise in prices.The naira (sign: ₦; code: NGN) is the currency of Nigeria. It is subdivided into 100 kobo.

Central Bank of Nigeria, Abuja

The Central Bank of Nigeria (CBN) is the sole issuer of legal tender money throughout the Nigerian Federation. It controls the volume of money supplied in the economy in order to ensure monetary and price stability. The Currency & Branch Operations Department of the CBN is in charge of currency management, through the procurement,distribution/supply, processing, reissue and disposal/disintegration of bank notes and coins.

Nigerian bank notes

Then, most African nations are implementing SAP, as an economic `panacea’ inspired by the World Bank and the IMF. The objectives of a Structural Adjustment Program are largely the same for most African nations, because the world bodies presume that African economies are at the same level of development and are experiencing similar problems.

The stated objectives of the Nigerian SAP are to:

• Restructure and diversify the productive base of the economy

• Achieve fiscal stability and positive balance of payments

• Set the basis for a sustained non-inflationary or minimal inflationary growth, and

• Reduce the dominance of unproductive investments in the public sector.

The effect of mandatory foreign exchange markets has been to erode the value of the local currency over time. Most countries undergoing adjustment have seen their currency values plummet in relation to international currencies. After the implementing SAP in Nigeria, there have been a rapid increase in the number of new banks. At the end of 1983, Nigeria had 32 approved commercial banks of which 25 were functioning with a national network of 11,001 branches, there were 10 merchant banks and 22 development banks, including savings banks. Five by 1992, about six years after Nigeria has started implementing SAP, commercial and merchant banks had increased to 120, there were 500 finance houses, over 200 stock-brokers and brokerage houses, about 156 community banks, a people’s bank with over 210 branches, and 85 savings banks.

The Endless devaluation

All the African nations implementing SAP are today experiencing increasing indebtedness and budget deficits because they are not growing; a growing economy realizes budget surpluses and pays its debts. All the African nations implementing SAP are also experiencing mass unemployment in all categories.This trend has been experienced by the currencies of all nations that have been implementing SAP for about a decade.

Before SAP began in 1986, one dollar exchanged for 77 kobo (1 naira = 100 kobo). When SAP began later that year the dollar exchanged for 1.756 naira and the main complaint among corporate executives was that there was insufficient foreign currency (e.g., dollars) to exchange for the volume of naira available. As the dollar exchanged for more naira, companies became cash-strapped; they could not get enough naira to exchange for dollars. The dollar exchanged for 4.016 naira in 1987, 5.35 naira in 1988, 9.93 naira in 1991 and 22 naira in 1993.7 Interestingly, there has been an increasing gap between demand and supply. In 1988, $2,910 million was offered against $3,260 million demanded. In 1991, $262 million was offered on a monthly basis against the $788 million demanded. In July 1993, $290 million was offered against $3,439 million demanded, and in August, $230 million was offered against $3,930 million demanded.

Nigeria has been hindered by years of mismanagement, economic reforms of the past decade have put Nigeria back on track towards achieving its full economic potential. Nigerian GDP at purchasing power parity (PPP) has almost tripled from $170 billion in 2000 to $451 billion in 2012, although estimates of the size of the informal sector (which is not included in official figures) put the actual numbers closer to $630 billion. Correspondingly, the GDP per capita doubled from $1400 per person in 2000 to an estimated $2,800 per person in 2012 (again, with the inclusion of the informal sector, it is estimated that GDP per capita hovers around $3,900 per person). (Population increased from 120 million in 2000 to 160 million in 2010). These figures were to be revised upwards by as much as 80% when metrics were to be recalculated subsequent to the rebasing of its economy in April 2014.

Although oil revenues contribute 2/3 of state revenues, oil only contributes about 9% to the GDP. Nigeria produces only about 2.7% of the world’s oil supply (in comparison, Saudi Arabia produces 12.9%, Russia produces 12.7% and the United States produces 8.6%). Although the petroleum sector is important, as government revenues still heavily rely on this sector, it remains a small part of the country’s overall economy.

Petroleum industry in Nigeria

Nigeria’s proven oil reserves are estimated to be 35 billion barrels (5.6×109 m3); natural gas reserves are well over 100 trillion cubic feet (2,800 km3). Nigeria is a member of the Organization of Petroleum Exporting Countries (OPEC). The types of crude oil exported by Nigeria are Bonny light oil, Forcados crude oil, Qua Ibo crude oil and Brass River crude oil. Poor corporate relations with indigenous communities, vandalism of oil infrastructure, severe ecological damage, and personal security problems throughout the Niger Delta oil-producing region continue to plague Nigeria’s oil sector.

The pump price of P.M.S. currently stands at around ₦145 at fueling stations across Nigeria. An initial increase in the price of petrol (Premium Motor Spirit) from around ₦65 to ₦140 triggered by the removal of fuel subsidies on January 1, 2012, triggered a total strike and massive protests across the country. Then President Goodluck Ebele Jonathan later reached an agreement with the Nigerian Labour Congress and reduced the pump price to 97 naira. The pump price was further reduced by 10 naira to 87 naira in the run-up to the 2015 general elections. However, after the elections of Muhammadu Buhari, the fuel subsidies was removed again, and the pump price increased again, despite the fall in oil price.

Victoria Island, Lagos in the late 90s

Since the fall in oil prices in 2015 and 2016, the government exchange rate policy has limited devaluation of the naira due to inflation concerns by the President Muhammadu Buhari.

Talk over

The largely subsistence agricultural sector has not kept up with rapid population growth, and Nigeria, once a large net exporter of food, now imports some of its food products, though mechanization has led to a resurgence in manufacturing and exporting of food products.

For an average Nigerian, it would mean the deliberate downward adjustment of the value of the naira relative to dollar. A rise fall in the value of the domestic currency in terms of other foreign currencies in the case of fixed exchange rate system is referred to as devaluation, according to the Central Bank of Nigeria.

Currency devaluation have become a pronounced and monumental issue in Nigeria from 1986 to present day. The Nigerian official legal tender (Naira) have suffered tremendous loss in value against other major currencies of the world.

Monetary authorities should do what they can to reduce the temporary increase in prices lest it become permanent. Timing at this point becomes very crucial. More so, the Nigerian government should consider devaluation of currency as the last resort to the economic imbalance.

SUSA Monitoring reports and analyses  from TV, radio, web and print media around the world. 

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