The most effective indicator for measuring and evaluating the state of a country’s economy, apart from the Gross Domestic Product (GDP), is the currency. Most countries of the world keep their foreign exchange reserve in dollars. The United States dollar is the global currency of transaction and business dealings due to its effectiveness in retention of value and its readily convertibility.
Nigeria has the ambition and desire to join the G20 countries but all of these countries have reasonably managed their currencies. United States and the G20 countries, with comparative stable currencies, still use their lower denominations unlike Nigeria. The US dollar did not become the dominant, primary and global reserve currency out of affinity for United States, but for its ability to maintain its value, stability and durability. Therefore, why could Nigeria, with oil as its major source of foreign exchange, not retain its smaller currency denominations of 1kobo, 25kobo, 5 naira and so on?
With this prelude, let’s evaluate and analyse the present state of the naira. There was a time in Nigeria when smaller naira denominations, including one kobo, 5 kobo, 25 kobo, N1 naira, N5 naira were in circulation, used for business transactions. What happened to these smaller currency denominations? Let’s be logical and serious here, everybody knows that inflation and devaluation brought about the vanishing of kobo and smaller naira denominations. It is so sad that Nigerians of younger generation have never seen one kobo or five naira note.
By bringing about inflation, the monetary and fiscal policy makers failed the country. Nigeria, in the 1970s and 1980s, was spending excessively; the governors of the Central Bank of those years were poor guardians of monetary policy, with limited knowledge on how to maintain price stability and healthy macroeconomics immovability. Instead of them to be mopping liquidity, they opened the ‘water tap’ of liquidity to overflow the monetary base. By so doing, inflationary trend escalated and the value of naira began to depreciate.
Another heavy blow to the naira was when the International Monetary Fund (IMF) compelled Nigeria to devalue her currency in the so-called Structural Adjustment Programme (SAP), a mechanistic policy that brought the massive devaluation and subsequent fall of the naira.
Therefore, on the IMF assessment of Nigeria’s liquidity management, I was not surprised on the analysis by the IMF assessors. Let me make this clear, I still hold the IMF in high esteem, but when it comes to the devaluation and shock therapy which were administered by the organisation to struggling economies, they simply crippled emerging economies.
Liquidity management assessed by IMF on Nigeria’s Central Bank was right on the money. It highlighted the inflow of the revenue from oil export into the economy and its volatility. Excessive liquidity and overspending were underlined as detrimental and overbearing to the economy.
Since Nigeria‘s earlier lopsided fiscal and monetary policies contributed to the fall of the naira, there was no urgent need for the Herculean devaluation of naira to appease IMF in the 80s because the country did not have arrays of products to export in order to enjoy the advantage of lesser strong currency from competitive global market. Nigeria had oil to export, even with the artificial oil glut in the 1980s, the higher price of oil was bound to reemerge due to the rising demand from China and India.
But the then policy makers and governing financial leaders were impatient and could not have the courage and patriotic instinct to say no to the masterly IMF. The big house and power of international financial institutions, including the World Bank , Paris Club, London Club and, of course, IMF, intimidated and overwhelmed our policy makers who probably lacked the intellectual and pragmatic capability to defend the emerging naira. The naira was not protected and it gradually and steadily lost its value and strength as a consistent medium of exchange for Nigerians. This is the situation we still find ourselves today.
Chiakwelu is principal policy strategist at AFRIPOL