Gone are the times when 90kobo was $1 in Nigeria. With these misplaced financial steps, the country has been trapped in a loop of repeated financial mistakes. This, in turn, has affected the value of the Nigerian naira against the dollar.
While some of this can be political, some can be attributed to wrong financial decisions in the country. However, this has enriched some people and affected the currency’s value. Let’s take a walk down memory lane to know where the Nigerian naira started spiralling down.
How Nigeria’s naira crashed
There are several reasons why the Naira lost so much value. Let’s have a look:
The launch of the Second-Tier Foreign Exchange Market (SFEM)
The first downward trend can be traced to when former president Ibrahim Babaginda signed and introduced the Second-Tier Foreign Exchange Market (SFEM), a product of the International Money Fund (IMF).
This led to the launching of the bureaux de change and the eventual increase of the exchange rate of N17 to $1. Gradually, the economy changed, and 90kobo to $1 became a thing of the past.
The arbitrary age
This strategy was indirectly promoted under former president Sani Abacha (1993-1998). He introduced the Autonomous Foreign Exchange Market (AFEM), which allows the Central Bank of Nigeria (CBN) to sell dollars to people at a fixed rate of N22 to 41.
With the rigid exchange rate, high demand for the dollar, and scarcity, the black market business evolved and boomed. Contrary to the N22 to $1, it was N88 to $1 in the black market. This is four times the official rate.
People bought it from CBN and resold it in the black market. With the price difference, they made a lot of profit. This, in turn, affected the country’s reserves. This became the arbitrary age and the birth of the foreign exchange black market.
The short stable economy: The oil boom
With the discovery of crude oil, the Nigerian naira could survive the dollar. From $30 per barrel in 2003, it rose to $140 mid-2008. This way, the depleted reserve was gradually restored.
As the reserve was stabilised, the former governor of CBN, Chukwuma Soludo, connected the fragmented financial channels in Nigeria: CBN, Interbank, Bureau de Change and wire rates. The strategy made the naira earn 20% against the dollar and unified the exchange rate in all the channels.
In 2008, the oil price crashed to less than $50. Despite this, the economy was strong as the country had about $62 billion in reserve. Soludo controlled it by engineering a devaluation of the naira and the shutdown of Interbank for six months. This gave the oil sector the time to revive itself.
The economic undoing
Due to the financial decisions made by Sanusi Lamido, the former governor of CBN, the current governor Godwin Emefiele barred the Interbank forex market and 41 items from the foreign exchange. This undone the work done by Chukwuma Soludo. This, in turn, led to:
High standard of living
Crude oil can no longer cater to Nigeria’s cost of living. Compared to the time when a barrel was $30 and trading at $110, the country had an $80 margin difference. Now, the margin difference has dropped to the lowest ebb. This inadvertently reduced the revenue of the country. Compared to then, the country earns almost nothing.
Arbitrary and money laundering
Due to easy licenses, there were about 90 banks in the country from 1999 – 2004 during Joseph Sanusi’s tenure as the CBN governor. This also saw the rise of these banks’ foreign entities used for money laundering. It has seen the loss of monetary reserves in the country.
Arbitrage is taking over the banking industry. This is indirectly engineered by the CBN governor Emefiele. He barred the Interbank forex market and 41 items from foreign exchange.
This allows the CBN to have autonomy and decide who gets dollars and how much.
Possible way out
Explore other sectors other than the oil sector. The country cannot keep a tab on the industry. When oil prices increase, Nigeria is ready to generate money with no place to reserve. While confusion is at the helm of the sector when the price reduces.
Autonomy of the banking sector. Politics has driven the sector to what it is today. Specific individuals control the currency to suit their means, leaving the country’s coffer empty. This, in turn, has done more harm than good.
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