In the annals of currency fluctuation, no currency in its less than 40 year’s life has tumbled like the Naira. In the early 1970s, when Nigeria was on its way to redefine and separate itself from the colonial 'pound', the Naira emerged. Its emergence created high feelings of national pride. Nigerians felt that they had finally weaned themselves from their colonial masters. But weaning may be physical. The organic nature of the naira as the currency of the world's most populous black nation met undue challenges. It momentarily appeared to stand firm against the dollar and the sterling pound.
The naira held great promise. In 1985, when I left Nigeria for US, I paid N698.50 for a flight from Lagos to Dallas. Back then, such an amount of Naira fetched about $1,270. Today, a similar flight will cost a Nigerian about N230,000 and in dollar terms about $1,700. In 22 years therefore, the cost of the flight has changed by 34 percent or 1.54 percent per year in dollar terms but the naira change has been about 15 percent annually or 328 percent; an erosion of value.
The planned revaluation (to put the naira at about N1.25 to the dollar) meant to position it as the currency of choice for the proposed West Africa's common currency by 2009 is more of voodoo econometrics similar to rent control and price fixing. If the policy succeeds, exporters to Nigeria will drastically increase the price of their goods due to lack of corresponding goods to be purchased in Nigeria with the earned income except buying back oil, which will hurt Nigeria's economy.
Various factors affect the value of any currency. Many developing countries are debating on how they should structure their central bank to provide optimal monetary policy and attain high living standards for their citizens. Some central banks engage in fixed exchange rates (more like rent control) or parallel rates to satisfy government currency and market needs. While such may have short term benefits, the best approach to enhance the convertibility and stability of any currency is to allow the forces of the market to determine its value.
The policy machination by Nigeria's Central Bank Governor Mr. Soludo, is an attempt to price control the value of the naira. Such a control will deepen the Naira value because as it stands, the Naira has very little backing. The value of any local currency is strengthened against its competition when the purchasing power/value is measured with local goods and services. As the needs of the average Nigerian are met by goods imported into the country, the Naira is weak against currencies such as the dollar, pound or euro because besides oil, there are very limited goods purchased using the Naira, that Nigeria exports. With oil revenue contributing a disproportionate share of the foreign exchange earnings of the country (about 80 percent) the Naira is bound to fluctuate at very wide margins unless the country has a large foreign exchange reserve to mitigate the fluctuation.
The government ought to insist that investment in the oil sector should be done in Naira. By embarking on this avenue, the Naira will appreciate because of the benefit of 'return of' and 'return on' of invested capital. Since the multinationals bring their capital and demand repay in their currency, the local Naira is only used for operation.
Instead of embarking on Naira price fixing or pegging the naira at a given rate, what the policy should strive to do is increase and enhance local manufacturing and productivity volumes to a level that the average Nigerian can depend on local manufactured and produced goods. In addition, attempts should be made to stabilize the (overpriced and over-valued) price of government contracts and peg the interest rate charged by banks on loans going to certain key sectors in single digits.
The Naira will not sustain its value if locally, it cannot be used to meet the daily needs of Nigerians. The dollar is the only currency whose value is backed by the full faith of the US government and in 'God We Trust'. Other currencies peg their value to either the value of their foreign reserve or gold bullion. The Naira does not enjoy the full faith and backing of the federal government. Even if it does, such faith is non-collateral. There is limited foreign reserve to back the Naira value because the import volume is more than the Naira can sustain.