Economists measure the health of a country’s economy using several
indices: Gross Domestic Product (GDP), interest rates, the consumer price
index, etc.
But the regular person on the street does this with a different set of tools. Transport fares, food prices, and average wages are indicators closer to home for many of us. We can understand these more than the complex numbers that the experts deal in because these other measures relate directly to our wallets and meal tables.
There’s one other economic gauge that gets talked about quite
often: the value of our local
currency, the naira, relative to its global counterparts. For
most of us, a naira that’s strong against the dollar signals a robust economy.
But if it’s costing us more naira to buy a dollar, then we’re not getting
things right.
This perception is so strong, that many people refer to the
economic boom of the 1970s and early 1980s as the era in which “a naira equaled
a dollar.”
The history in the background of this fabled exchange rate
is an interesting one. And we’ll tell it here, with the crucial details that
are sometimes missed out when the story gets told.
How the Naira Held
its Own
It turns out that the naira started a rather strong
currency. When it was introduced in 1972, its exchange rate against the pound
was set at about ₦2 to ₤1. If you wanted to get a dollar that year, you only
needed 69 kobo to get one.
The naira held this strong position against the dollar
throughout the 1970s. By 1980, it took just 55 kobo to buy a dollar.
A few things were going in the naira’s favor at the time.
The most important of these was the oil boom. Nigeria earned a lot of foreign
exchange—basically dollars –from its sale of oil at the international markets. In
simple terms, this meant that there were plenty of dollars to match the naira
circulating in the country’s financial system.
As long as the price of crude oil remained high, Nigeria’s
foreign exchange earnings remained high too. And the naira stayed strong.
This didn’t go on forever. Early in the 1980s, the world
became awash with oil. Crude oil prices fell as a result, and Nigeria’s forex
earnings plummeted with them.
A Currency Struggling
to Keep Up
In 1986, the Ibrahim Babangida regime devalued the naira, in
keeping with the conditions laid out by the IMF for economic recovery. BY 1993,
$1 sold for ₦17.
Throughout the regime of General Sanni Abacha (1993-1998),
the exchange rate was fixed at ₦22 to $1. However, this was an
artificial rate. This disparity between the official rates and the market rates
led to the strengthening of the ‘black market’, where the dollar sold for up to
four times the official rate.
Shortly after democracy returned, the
Central Bank had to officially devalue the currency again. A new rate of ₦85
to $1 was set. This brought the rates closer to the black market rates, which
stood at ₦105
to $1.
The country got a double break in the mid-2000s. Oil prices rose again, swelling the country’s forex earnings. It also had an $18 billion debt relief, which freed it from having to service debts with scare forex. Under the CBN governor Chukwuma Soludo, Nigeria’s foreign reserves surpassed $60 billion. The naira strengthened against the dollar. In 2005, $1 sold for ₦132; by 2007, it went for ₦115.
But this period of recovery was also shortlived. While the
country enjoyed another period of sustained oil price increase in the early
2010s, it couldn’t save enough to shore up its reserves. When oil prices
crashed again between 2014 and 2016, it triggered a recession. Massive currency
devaluation followed. At one point in 2016, a dollar sold for almost ₦500.
The exchange rate has since stabilized. The official
exchange rate currently stands at about $1 to ₦306.
Is a Strong Currency
Necessarily a Good Thing?
We might think that a strong naira is always a good thing.
But it isn’t. A naira that’s firm against international currencies could make
it easier for Nigerian companies to invest in assets abroad, for instance. But
it also makes exports expensive (and unattractive) and makes imports cheaper
(and more attractive).
In the end, it all depends on when the currency is strengthening or weakening. We’re better off with a slightly weaker naira if the economy is growing slowly; it could make our exports cheaper and imports less attractive. But a stronger local currency is preferred when we’re growing fast because it ensures that the economy doesn’t ‘overheat’.