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Since 1986, the Nigerian naira’s relationship with
the US dollar (and other foreign currencies) has
been erratic, (un)predictable, violent and full of
heartbreak and tears. The built-in dysfunction
has also made a lot of people very rich.
This piece seeks to trace the history of how
Nigeria’s foreign exchange management became
what it is to the point where the exchange rate
of the naira has become a deeply political
matter. The current debate continues to be
around whether or not Nigeria should devalue the naira.
But what if devaluation is the answer to a
President Ibrahim Babaginda’s Second-Tier
Foreign Exchange Market (SFEM)
In September 1986, the SFEM was introduced as
part of a package of IMF reforms that general
Ibrahim Babangida (IBB) was forced to accept
given the mess that Nigeria had managed to find
itself. Before this, in the 70s to early 80s, the
naira exchanged for something like 90 kobo to
$1. By the time IBB left office in 1993, the naira
was exchanging for 17 naira to $1. It was during
this time that bureaux de change were
introduced into the economy.
The rate at which the naira depreciated in those
few years probably explains why Nigerians have
never gotten over the idea of a strong currency
as the mark of a ‘strong’ economy. People only
remember that things got worse as the naira lost
ground to the dollar. To make matters worse, the
industrialisation that a weaker exchange was
supposed to bring about never materialised.
Military Head of State Sani Abacha (1993-1998)
From the day that Abacha took power to the day
he died on June 8 1998, a period of some five
years, the ‘official’ exchange rate of the naira to
the dollar never changed from 22 naira to $1.
The Autonomous Foreign Exchange Market
(AFEM) was introduced in 1995 as a way for the
Central Bank of Nigeria (CBN) to sell forex to
end users at ‘market’ rates.
But it is one thing to declare that the naira is
worth 22 naira to $1. It is quite another thing to
be able to satisfy all the people who will demand
to buy dollars at that price. Given that oil prices
were below $20 a barrel in this period, there was
a very limited amount of dollars available
(whatever was left after those in charge had
This rigid exchange rate gave birth to a
phenomenon that is now a permanent fixture
todayâ€Š—â€Šthe mainstreaming of the forex
black market. At one point, the naira was trading
as high as 88 naira to $1 while the official rate
remained at 22 naira. Bankers came up with they
used to call the ‘blended’ rate. Say a client
requested $1 million from their bank, the bank
would inflate it to say $10 million and then take
the request to AFEM knowing that CBN would
never approve the full request anyway. Whatever
was obtained from CBN was then ‘blended’ with
the rest obtained from the black market.
It does not take a genius to know that if the
black market rate was four times the official
rate, people made an absolute fortune from the
arbitrage. A lot of banking fortunes that remain
to this day in Nigeria were made in this period. It
was sweet business.
Joseph Sanusi (CBN governor 1999 to 2004)
The Interbank Foreign Exchange Market (IFEM)
was introduced under Joseph Sanusi. Given how
Nigeria’s reserves had been depleted severely in
the two years before he took over, the naira was
never going to survive the ‘military fiction’ rate of
22 naira for very long. Within a year, the naira
was trading at 85 naira but this time, the gap
with the black market had closed considerably at
105 naira to the $1—particularly if compared to
what happened under Abacha.
In addition to low oil prices, Nigeria was also
struggling to service its $33 billion foreign debt
which was eating up valuable foreign exchange.
All the things we see today were also
experimented with under Sanusi. He suspended
the IFEM for six months when the naira came
under pressure and also introduced a limit to the
margin (above CBN’s rate) that banks could sell
their own forex for. Current governor Godwin
Emefiele is doing the same thing today.
Again, the attempt to ‘control’ the exchange rate
gave rise to all sorts of funny games. Since the
rate at which banks could sell their forex was
fixed, they simply complied with this rate at the
IFEM but then collected an extra payment
outside the system to make up the difference
with the ‘real rate’ at which they were actually
selling. Some bankers called this game ‘NIBSS
and Drafts’ i.e. you pay the official rate via
NIBSS (Nigeria Inter-bank Settlement System)
but settle the difference with a bank draft.
Forex round tripping games flourished. Nigeria
had all sorts of banks which totalled around 90
at one point.
The licences were cheap and you could make
the cost of the licence back in one year from
round tripping. It was a win-win business. Banks
also set up foreign entities which they used to
help their clients move money abroad. One bank,
now defunct, used to regularly reward employees
with a Volkswagen Jetta for outstanding
performance. In banking circles, the joke then
was that the Jetta was always won by the
bankers in the treasury department i.e. the best
round trippers in the bank.
Chukwuma Soludo (2004-2009) and The Oil
Starting in late 2003, oil prices began to rise
steadily from around $30 per barrel till they
peaked at $140 per barrel in the middle of 2008.
It was also during this period of rising oil prices
that Nigeria obtained its $18 billion debt relief
from the Paris Club. It was like being in heaven.
First of all, rising oil prices allowed Nigeria’s
foreign reserves to increase substantially. There
were reserves and there was also the Excess
Crude Account (ECA) which had more than $20
billion at one point in 2008.
What these happy events allowed governor
Soludo do was to harmonise the four different
exchange rates at the time. CBN, Interbank,
Bureau de Change and wire rates. He did this by
liberalising the foreign exchange manual and
including all sorts of things that were previously
not accepted as valid for foreign exchange
requests. For example, previously you could only
obtain foreign exchange to bring in ‘raw
materials’. But in the world we now live in,
manufacturing has changed to the point where
you might need to import some finished products
to add to your own process. His liberalisation
He also made things like medical bills and even
credit card bills allowable. And he achieved his
aim. In a short while, the different rates
converged to within one naira of each other
given that there was no need to go to the black
market or bureaux de change to get forex when
you could get it officially from your bank. Nigeria
was awash with dollars and bankers at the time
spoke of not even needing to go to CBN for
dollars for weeks. Indeed, they say CBN staff
used to harass them as to why they had not
come to buy dollars. This was the period when
the naira gained about 20% against the dollar
without anyone explicitly trying to ‘strengthen’ it.
Let us all come together as one Nigeria to save the naira. We are suffering from it, some people see this as an opportunity for them to make extra money in their various business.
Everything has gone up in the market today, even made in Nigeria’s goods. Let’s stop this now, because if we don’t our children children’s will be the ones to suffer. Let’s make a change now that we can. Let’s Save The Naira.
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