A History Of The Naira- Save The Naira Part 2- A Must Read!!!

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And then the inevitable happened, oil prices

started to fall from late 2008 to less than $50 by

the end of the year. But this time around, Nigeria

was in a pretty good position to weather the

storm with reserves totalling around $62 billion.

Nevertheless, Soludo engineered some kind of

artificial scarcity of forex to allow a devaluation

of the naira. He also banned the Interbank

market for six months.

All told, when Soludo took office, the naira was

trading at 127 naira to $1 and by the time he left

in 2009, it was around the 147 naira mark. But

this masks the fact that in 2008, it actually went

as low as 115 naira to $1 at one point. Oil prices

started to recover pretty quickly and so if Soludo

had done nothing, it would have just cost Nigeria

some of its reserves and normal service would

have resumed after about eight months.But the

temptation to ‘do something’ is always strong.

Save The Naira

Save The Naira

Sanusi Lamido Sanusi (June 2009-Feb 2014)

Nigeria’s central bank governor Lamido Sanusi

looks on during a 2012 interview in New York

As soon as oil prices recovered, Central Bank

governor Sanusi Lamido Sanusi (SLS) restored

the Interbank and WDAS markets that Soludo

had previously banned. But he then faced a

somewhat strange problem later on. Oil prices

were high but Nigeria was not building up its

reserves for reasons that are perhaps now

obvious. This meant that he did not have enough

dollars to defend the naira and keep it stable as

he wanted.

To solve this problem, [b]he removed the one-

year restriction on foreign investors who wanted

to buy government bonds. (Previously, any

foreign investor who wanted to buy Nigerian

government bonds needed to hold the bonds for

one year). The dollars came pouring in. But then

this was what is known as ‘hot money’ i.e since

you did not need to hold the investment for one

year, the money poured in and out rapidly.

JP Morgan’s requirement to include Nigeria in its

index was always that the market was kept

liquid. [/b]As soon as this was done with the

removal of the restriction, there was not much

else standing in the way of Nigeria being

included in the index. Nigeria’s Debt

Management Office even took a 2-page advert in

the newspapers congratulating President

Jonathan on Nigeria’s inclusion in the JP Morgan


Given that oil prices remained high throughout

SLS time in office, some measure of stability was

achieved. The naira was trading at 148 naira to

the dollar when he took office in 2009 and was

164 naira by the time he was suspended from

office in February 2014.

The stability of the graveyard. Godwin Emefiele

and where we are today

It costs something like $30 to extract a barrel of

crude oil in Nigeria. So when oil was trading at

$110 Nigeria had a margin of around $80 to play

with. But when oil drops to $45 as it has now,

that $80 margin turns to $15 as the cost of

getting the oil out of the ground still has to be


To put the above numbers another way, while oil

prices have dropped by 60%, the revenues

available to Nigeria have dropped by 81%. That

is, revenues have dropped much more than oil

prices have dropped. Nigeria is earning almost

nothing these days and you can imagine how

disastrous it will be if oil prices drop further to

$40 or even less.

When things like these happen, one way to

defend yourself is by unleashing your reserves.

So for example, Algeria had something like $150

billion in reserves when the oil crisis hit. But as

stated above, Nigeria did not save anything when

the going was good so the country walked into

this oil price crash practically Unclad. Reserves

are allegedly $30 billion today but in reality they

are much less (maybe around $20 billion when

you account for all the money that is already

‘spoken for’)

Governor Emefiele has done the usual in

response. He has banned the Interbank forex

market and also banned 41 items from being

eligible for forex, directly undoing what Soludo

did. Forex is now essentially being rationed and

the CBN is deciding who gets what and how

much. Rumours of privileged people making a

fortune from the confusion and arbitrage are

circulating among bankers once again.

What can we learn from all this? The most

obvious lesson here is that Nigeria has never

quite figured out how to spend oil money. When

prices are high, you save as much as you can.

When prices fall, you open the tap and increase

your spending. The point of this is to keep things

going steady and avoid wild shocks in the


What Nigeria instead does is to increase

spending once oil prices go up with things like

increased minimum wages, bloating the civil

service or even outright theft. Politics always

manages to bully economics. With the exception

of the one time under Soludo, this is how things

have always been. Nigeria is never ready for

when oil prices drop. And yet, oil prices dropping

is as sure to happen as night following day.

Another lesson is that the politicisation of the

exchange rate of the naira is an unhealthy

obsession in Nigeria. It gives politicians an

incentive to wage war against reality by doing

things that are economically harmful in the name

of maintaining a ‘strong’ currency. Economic

nationalism comes into fashion, why do we need

to import rice when we can grow it here?

Yet, the rhetoric only lasts till oil prices go back

up and then politicians can return to their old


The very act of trying to fiddle with the currency

whenever we run into trouble is what really

needs to be looked at. The moment oil prices

crash, businesses and transactions that were

perfectly legal suddenly become ‘unpatriotic’. And

then a pointless argument about what should be

imported and what should not predictably take up

valuable media space.

Nigeria wants to have high oil prices and spend

without saving. It then wants to keep its

exchange rate ‘stable’ even when revenues have

collapsed dramatically.

It is not possible to have all these things at the

same time. It’s time to depoliticise the naira

exchange rate by allowing the market to

determine its fair value.

There are no easy answers to this problem.

Having an economy that is not tied to the price

of one product that is bound to have wild price

swings is an obvious solution. But wanting a

diversified economy and actually having one are

two completely different things. And if Nigeria is

going to diversify its economy, it has not even

started yet.

Over the last 20 years or so, Nigeria has slowly

but steadily moved towards a market-determined

foreign exchange system. This is the right thing

to do as it takes the matter out of the hands of

politicians. Given the severity of the current

crisis, all those gains are now being undone with

all kinds controls and erratic moves that slowly

choke the life out of the economy.

If Nigeria won’t save when oil prices are high,

then allowing the naira to float and be

determined by the market is the only credible

option left. Who knows, this might even teach

some sense.


A History Of The Naira- Save The Naira- A Must Read!!!

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