STAR ARTICLE: The naira, the US dollar, oil and the Nigerian economy



The naira, the US dollar, oil and the Nigerian economy : Nigeria's
foreign reserves is under-developing the state

Richard Akinjide

Thursday, May 19, 2005

When in 2002 the Euro became the only legal currency of the European
Union, it traded for about 1.1 US dollars. Then for a prolonged
period of time the Euro persistently lost value. First, it fell to
one US dollar. Then it went below and continued to depreciate.
European analysts who expressed concern about the stability and worth
of the new currency were told that the Euro could only be assessed
over the long-term. This comment was right. After 9/11, the American
invasion of Iraq, the war in Iraq and the resurgence of the American
budget deficit, things changed. There was a sharp turn. The Euro
began to appreciate again. Since then it has continued to do so
steadily. In the first quarter of 2005 one Euro could buy as much as
1.33 US dollars.

The Euro is not the only major currency to have appreciated with
respect to the US dollar. Others have done so as well. But as far as
the Euro is concerned, the appreciation has been particularly
noticeable: as much as 30% in only 3 years.

Recent performances of the Nigerian Naira.

It was in the course of 1999 that the Nigerian currency depreciated
to above 100 to the American dollar. At the end of 2000, the US
dollar was worth 117 Naira. In the middle of 2001 it was worth 132
Naira. Then the fall stopped. In the second quarter of 2005, the
dollar can buy 136/137 Naira.

In the past 4 years the Naira has therefore been stable with respect
to the US dollar. From mid-2001 to mid-2005 the Naira lost only about
1 point per dollar per year.

This is in sharp contrast with both 2000 when this year alone it lost
17 points and 2001 when it lost 15 points. In 2002-2005 the Naira has
performed 15 times better than in both 2000 and 2001. This is not
because one has tampered with the market.

The Naira is valued competitively on a market which reflects
correctly the Naira' s worth. The Naira does indeed follow the law of
supply and demand. The market mechanism has been put in place by the
World Bank. Supply is made of the volume of US dollars the Nigerian
government makes available for foreign purchases of capital goods,
raw materials and consumption goods. Demand is made of all US dollar
requests people in Nigeria make through their banks to purchase such
foreign goods. So if there is market stability this is a policy
success Or so it seems.

Yet, to be sure to be right acclaiming the persistent stability of
the Naira on this market, to be sure to be right congratulating
government for a job well done, we must first understand the reasons
and policies behind this stability. After all, a stable Naira with
respect to a depreciating US dollar means a declining Naira with
respect to other major currencies. At this stage it is useful to take
a look at the oil market.

The world oil market and the price of oil.

In parallel with the above developments, the price of oil on the
world oil market has been sky-rocketing. The reasons are less to be
found in the politico-military scene than in two major developments:

I. The emergence of new zones of rapid and durable economic growth -
China, India, Brazil - which drive oil consumption up, and

II. The increasing scarcity of primary energy sources worldwide.

The rising oil price trend is unlikely to be temporary. It is a
lasting phenomenon. This is good news for Nigeria which supplies well
in excess of 2 million barrels a day of the best crude in the world
and large volumes of liquefied natural gas. The impact on Nigeria's
financial position has been substantial and is likely to last.
Nigeria's foreign reserves have reached over US$21 billion.

Government now has the means - probably the durable means - to
finance sound monetary and development policies.

Recent developments in Nigeria's economy

Yet, Nigeria continues to be a poor, one-crop economy with under-
developed basic infrastructure and no significant economic
development. All what Nigeria does is to sell oil and gas abroad (in
US dollars) to buy most of what it needs also abroad and in foreign
currencies. Nigeria's non-oil domestic production is not significant
enough to have any noticeable impact, even domestically.

This is true for the present time and the foreseeable future, even
more so if present government policies persist. Foreign exchange will
therefore continue to be in heavy demand for a while, and a strong
Naira is essential for the well being of Nigeria's economy just as
the substantial capital investment expenditures which should be (but
are not) implemented would be essential for Nigeria's development and

In no circumstances can a weak Naira or an excessive foreign exchange
reserve do us any good at present. A weak Naira could benefit us if
we have goods and services to sell abroad. But we have nothing to
sell abroad except oil and gas which are traded in US dollars. A
large foreign reserve would help us if the future of our only trading
commodities (oil and gas) was bleak. But it is brighter today than it
has ever been.

What government has done over the period under scrutiny is the
contrary of what should have been done if there had been a real
desire to develop the Nigerian economy.

In order to keep the Naira stable with respect to the US dollar while
accumulating a large US dollar reserve, government has not only
refrained from using the growing oil and gas money to invest,
stimulate economic development and generate a much needed rise in
purchasing power, it has also depressed domestic demand by

I. Increasing significantly tariffs on imported goods and,

II. Weakening the Naira further, allowing it to fully absorb the
international depreciation of the US dollar.

Nigeria is working wholeheartedly for the United States of America!

Suggestion for an alternative, independent currency policy

What we should have done is to spend a good proportion of the large,
unproductive volume of the idle US dollars we have accumulated to do
two things:

I. To keep the Naira stable. Not with respect to the US dollar but
with respect to the strong currencies of this world such as the Euro.
This would not have been a more difficult job than what we have
achieved: to keep the Naira stable with respect to the US dollar.

II. To finance productive investments.

If we had done so, it is my best assessment that there would be today
more economic activity, more employment, less inflation and the Naira
would have aligned with the strong currencies of this world. It would
have Indeed appreciated to US$110 perhaps, to US$105, perhaps why not
to US$100 in less than the past 3 years?

Keeping the Naira strong has been a repeated demand of enlightened
Nigerians over the years. Some have even gone as far as suggesting
that government should decree a value for the Naira as if this were
feasible. In normal circumstances it would take much time, money and
effort to make a strong Naira. The Naira will become strong only when
it is a means of international exchange, when there is a Naira demand
emanating from masses of people around the world who are willing to
buy and own goods made in Nigeria. This is a remote possibility as it
is clear that we shall not become substantial non-oil exporters
before long.

But today's circumstances are not normal. They are exceptional and
Nigeria who has had a unique chance to quickly increase the
purchasing power of the Naira has missed the opportunity. Why?
Because against all the competitive rules put forward by the World
Bank, the US has a trade monopoly with the Nigerian currency.

Why does the Naira only trade against US dollars? Why has the dollar
acquired this monopoly? Who granted it? These are questions for
another debate. But it is an important debate and not only a debate
for Nigeria. A recent criticism addressed to the European Central
Bank was that it continued to maintain US dollar reserves resulting
in a loss of over 1.4 billion Euros in 2004.

When Nigerian foreign reserves began to accumulate, government should
have allocated a billion US dollars or two to acquiring Euros.
Government should have then opened a second competitive market
supplied with Euros. A market similar to that where Naira are
presently traded against US dollars. The Nigerian foreign exchange
demand would have then had the choice of buying either US dollars or
Euros. It would also have had the choice of buying either US dollars
for Euros and vice-versa at world market prices. Even if it were US
dollars that traders needed, they would have bought Euros. Why?
Because they would have studied the market, observed the steady
appreciation of the Euro and concluded there was the chance of a gain
as Euros earlier bought could be later sold to buy more dollars and
make a profit in Naira.

Example. Let us assume a starting position in which both Euro and US
dollar are at the same parity of 1 for 100 Naira. A Nigerian investor
wants to buy a machine from a factory in Texas for US$10,000. He must
therefore seek 1 million Naira worth of foreign exchange. He chooses
to buy Euros and acquire 10,000 of them. A month later, the Euro
trades for 1.05 to the dollar. Because the naira is stable, the Euro
still trades for 100 to the Naira while the US dollar trades for less
than 100 to the Naira. The investor decides to sell his Euros and
gets US$10,500. He buys his machine and is left with an extra US$500
with which he credits his Naira account.

Certainly, he will get less for it than the 50,000 Naira he would
have got if the Naira-US dollar parity had not changed. But
undoubtedly he will get something.

Undoubtedly, he will make a profit. In contrast, at the starting Euro-
US$ parity or if there had not been (as it is the case today) a way
to trade Euros, he would have got nothing.

The investor's profit is the direct consequence of the international
stability of the Naira. He is not only able to finance the purchase
of his machine but he also manages to get some Naira back on his bank
account because the Naira has done better than the weak currencies of
this world and because he happens to trade with one of them. More
importantly, the domestic economy has also made a substantial profit.
The purchasing power of the Naira has remained the same in countries
with strong currencies and has increased in countries with weak ones
such as the USA.

If the dual currency market had been put in place, opportunities such
as that described above would undoubtedly continue to arise today.
Economic fundamentals are all against the dollar appreciating again
before some time. It is more than likely that the Nigerian demand for
US dollars would have gone down and so would its Naira price, the
exchange rate. Who knows where the dollar would be today? It is
certainly not too late to start but the discussion above gives an
idea of the magnitude of the cost of the opportunity already lost to
the Nigerian economy.

Most unfortunately, what is presently in place in Nigeria is a
deliberate government policy to prevent the domestic economy from
taking advantage of the depreciation of the US dollar. What can we
seriously expect when our finances are de facto run by the World Bank
and the International Monetary Fund (IMF)?

What are the consequences of our failures and wrong policies?

For us, they are poverty and misery and the further destruction of
our already miserable middle class as if we are not part of the human
race. For the advanced industrial nation, it is better life. John
Maynard Keynes, the Cambridge University Professor of Economics and
the Leader of the British Delegation to the Bretton Woods, New
Hampshire, USA, where the World Bank and the IMF were established,
once said in another context of the economic consequences of wrong

"For the middle and upper classes (in industrialised nations) life
offered, at a low cost and with the least trouble, conveniences,
comforts, and amenities beyond the compass of the richest and most
powerful monarchs of other ages. The inhabitant of London could order
by telephone, sipping his morning tea in bed, the various products of
the whole earth ....he could at the same moment and by the same means
adventure his wealth in the natural resources and new enterprises of
any quarter of the world, and share, without exertion or even
trouble, in their prospective fruits and advantages.... He could
secure..... cheap and comfortable means of transit to any country or
climate without passport or other formality .... But, most important
of all, he regarded this state of affairs as normal, certain, and
permanent, except in the direction of further improvement, and any
deviation from it as aberrant, scandalous, and avoidable."

Nigeria has no welfare system.

In 1883, German Chancellor Otto von Bismarck created the first
welfare state by instituting mandatory national health insurance,
followed by social insurance (what we now call Social Security),
accident insurance, and unemployment insurance. Between 1898 and
1911, New Zealand, Austria-Hungary, Norway, Sweden, Italy the U.K.,
and Russia all followed suit. Washington, meanwhile, held the line on
new social spending but tightened its hold on the banking sector by
creating the Federal Reserve System in 1913.

Universal wisdom demands that when a nation is in economic hole, it
must stop digging to survive. Nigeria is in a big hole in economic
and financial matters, yet Nigeria continues digging! Why?

Chief Richard Osuolale Abimbola Akinjide, is a former Attorney
General of the federation, and is presently delegate to the National
Political Reform Conference.



Chief Akinjide has made both excellent observations and
recommendations to get Nigeria out of its current regressive monetary
policies. A "stable" foreign exchange rate with respect to the US
dollar in the face of a rising foreign reserve and falling dollar is
a false stability and would ordinarily be held to violate economic
laws. We should be worried, and not be crowing about such stability.

The unalloyed fascination for US approval, and kow-towing to the
Bretton-Woods institutions by many of our political leaders,
particularly President Obasanjo, and their economic advisors
complicates, and in fact undermines their ability to tow an
independent course on these matters. Liberalization, deregulation
and privatization become mantras without properly studying the
context of the domestic economy, without understanding that time and
life cannot stop in the hopes of uncertain advantage from painful and
non-consensual economic policies in a prebendal polity. People like
Chief Akinjide and Prof. Sam Aluko and many others who urge a
revision of priors on these matters are either ignored or outrightly

Whether such unpatriotic action is due to pure venality or forgivable
ignorance is arguable, but its effect is clear: a continuing
immiseration of a country that has no business being so economically

Is there a revolutionary leadership waiting in the wings in the
country to fundamentally change these course of things ? Hardly any
is seen in the horizon. Personalities may differ, a feeling of
increased participation may ensue, but fundamentally changing the
economic course of the country - which after all is what makes a
country and its citizens richer or poorer - will be a miracle.

Bolaji Aluko