By Babajide Komolafe
The exchange rate data above showed that the nation’s currency, the naira, suffered severe depreciation in the 20 years of Nigeria’s Fourth Republic.
From N21.89 per dollar at the end of 1999, the naira depreciated by 1,450 per cent to N306.59 per dollar as at last week in the official forex market. Indeed, at the height of the economic recession that came with the present regime in 2015, the rate of depreciation closed at 2,330 per cent on the exchange rate of N510/USD.
Though the external reserves recorded huge increase during this period, from $5.5 billion at the end of 1999, to $45 billion as at last week, it, however, experienced bouts of volatility.
The declining fortunes of the Naira and the fate of the reserves in the last 20 years, according to analysts, can be traced to Nigeria’s overdependence on crude oil as major foreign exchange earner and the country’s poor attempt at economic diversification almost in every regime since 1999.
Commenting, Razia Khan of Standard Chartered Bank, United Kingdom, said: “It is always difficult to prove the counterfactual, but Nigeria’s various attempts to fix its foreign exchange (FX) regime have not necessarily lent themselves to economic diversification.
Speaking further, Khan, who is the Managing Director, Chief Economist, Africa and Middle East, Global Research at the bank said: “There may have been significant episodes of currency over-valuation over past decades, making it cheaper to import goods and services, than to try to produce them domestically. This FX policy might have cost Nigeria a great deal in terms of domestic production and diversification potential, that was ultimately forgone.”
Also analysing the factors that worked against the naira in the last 20 years, Lukman Otunuga, Research Analyst, FXTM, said: “There has been a progressive depreciation in the value of the Naira since 1999 while the nation’s external reserves have followed a somewhat positive trajectory within the past 20 years. An interesting observation is the decline of reserves between 2008 and 2014 at a time when the naira was trading around N150. While it may seem like there is no correlation between the naira exchange rate and foreign exchange reserves, the missing piece of the equation is oil prices.
“It must be kept in mind that oil exports still account for a handsome chunk of Nigeria’s foreign exchange earnings, so when prices of oil started to fall in 2008 amid the financial crisis, the nation’s reserves took a hit.
“Although the recent resurgence in oil prices has boosted Nigeria’s external reserves towards $45 billion, it does not change the fact that the nation remains heavily exposed to external risks. Should oil prices depreciate, this will complicate the Central Bank of Nigeria’s efforts to defend the Naira against domestic and external headwinds.”
However, Lukman and Khan opined that this ugly trend can be reversed consequent upon certain changes to the nation’s foreign exchange management policy.
“Resilience to economic shocks matter,” said Khan.
“After the 2014 collapse of the oil price, the more managed currency regime from February 2015, after an initial depreciation, meant that the exchange rate could not fulfil its function as that nominal variable, able to absorb the external shock Nigeria had experienced, by acting as a buffer.
“Because the FX rate was fixed, the full burden of the external shock was transmitted to the Nigerian economy, bringing about a recession that may have been deeper than was strictly necessary,” she added.
Otunuga on his part averred that, “for the Naira to appreciate and external reserves to remain at healthy levels, Nigeria must diversify away from oil reliance and source growth from other sustainable sources such as agriculture.
While the multiple exchanges have provided short-term stability, this is unsustainable in the longer term, with the CBN at the mercy of external risks. While the idea of a single exchange rate may be warmly welcomed by foreign investors, it may lead to heightened inflationary pressures in Nigeria.”