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MID-WEEK ESSAY: Defending The Naira, Nigeria's Currency - Some Thoughts

by

Mobolaji E. Aluko, PhD
Burtonsville, MD, USA

Wednesday, April 25, 2001

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Let me start with a disclaimer: I am an engineer, not to be confused with
a trained economist or a banker, but I know that our Nigerian currency the
Naira is sinking fast - and that should not be!

So here goes some lay man's observations.....

I have watched Alan Greenspan of the US Federal Reserve and his
predecessors here time and again - including Greenspan's surprising prime
interest rate cut last week - and all they do seems to be a constant
juggling act between:

(1) interest rates;
(2) money supply

on the one hand, while determining snapshots of:

(3) dollar exchange rate against leading world currencies and;
(4) the nation's productivity and inventory stock;
(5) consumer savings and debts;
(6) trade deficit.

on the other hand. What really determines what remains nebulous to me and
I am sure to many, but it appears that Greenspan and his colleagues have a
"secret" analytical formula which enables a determination of interest
rates from all these other factors, while all the time trying to keep an
eye on the strength of the dollar, thereby "fixing" the exchange rate
within an acceptable range.

Thus, it is clear that the "independent" Federal Reserves (quite
independent to a large extent) assists the US government in "market
control" while giving an appearance of merely reacting to the market.
Thus, after trying to "understand the sentiments (expectations) of the
market", Greenspan and his Federal Reserve gremlins "control" interest
rates FROM THE FEDERAL RESERVE by "fixing them" at certain values.
However, they have no control over (i) banks who are FREE to determine
their own margins from there on, or over (ii) the psychology of consumers
or businesses who may decide to buy or not to buy, or to be more
conservative in their inventories, or over (iii) foreign market reactions
to their moves.

When Greenspan believes that the dollar is TOO WEAK or TOO STRONG compared
with a basket of foreign currency, which might be a result of a
combination of (i) changed domestic productivity, (ii) changed foreign
productivity or (iii) deliberate revision of foreign currency strength, he
then HOPES that CHANGING the US interest rate would spur or hold back
productivity and/or stimulate/hold back domestic citizens' savings etc..

All self-respecting Central Banks of countries should do take these
actions in the interest of their own countries.

What about Nigeria? Some of President Obasanjo's economic and financial
advisers must know this game - or don't they? - but whether they can
participate in it, or Obasanjo has the capacity to follow their logic,
proclivity to listen to advice or whether he cares beyond this hollow
"nationalism" persuasion remains a question.

One major concern with Nigeria, however, is whether we even have the
reliable and timely data to do all of these calculations.

The other problem with Nigeria is that quite frankly our economic advisers
and central bankers don't have the luxury of a whole lot of parameters to
work with. Our domestic savings profile is very low, our productivity is
abysmally low (and falling) and our debt profile ($28.5 billion at last
count) is outrageous. The direction that we want ALL OF THEM TO GO are
therefore SET (no up or down, just UP for savings and productivity and
DOWN for debt etc.). Hence we have little or no room for flexibility.

Yet we have a monoculture of oil which is virtually our ONLY foreign
income earner - a price determined not by us but by the OPEC oil cartel -
with cash crop cocoa's international price rising and falling whimsically.
Allowing our foreign exchange rate to FLOAT so freely in an economy so
dependent on IMPORTS therefore promotes UNCERTAINTY in business planning
and hence short term, speculative tendencies and their attendant capital
flight.

That is why I believe we must FIX our foreign exchange for reasonable
length of times, or at least let it FLOAT only within a very tight pre-set
margin, while EXPENDING money on those infrastructures that sap the energy
of otherwise productive entities in the country. Just as Greenspan uses
interest rates as the rudder of his market control, Nigeria should
determine its own rudder - I support the exchange rate - thereafter doing
everything fiscally and monetarily possible to ensure its success as such,
using progressive development policies.

The bottom line is the following: WE DO NOT HAVE THE LUXURY OF THE
SAME PARAMETERS TO PLAY WITH WITH THE DEVELOPED ECONOMIES, so our
whole-sale free-market economic policies simply will not work, and we
will have to use the fixing of the exchange rate to "work towards the
answer." When in fact certain infrastructures are in place, then our
economy will benefit from greater liberalization and western-style
fiscal and monetary policy management, otherwise it will remain
subject to wild speculations.

Thus, I believe that at this point in our countries level of
development:

(1) our currency should not float; ie we should fix our exchange
rate at say N80 to 1 dollar, and set targets at the end of
every six months to one year to revalue it upwards by say 10%
each time. After all, there is no IMMUTABLE standard in the
world for fixing exchange rates.

(2) the government should deposit money in banks which voluntary set
interest rates to say 10%, and then lend a certain fraction of
their money to citizens for productive use for an agreed
reasonable margin of profit. The kinds of high interest rates
that we currently have (17 - 25%) on short-term money lending
militates against long-term investments which the country
needs, discourages small-time businessmen from borrowing
from banks, and encourages "round-tripping" in currency
speculation from abroad.

(3) set HIGH TARIFFS on imported conspicuous consumption items,
and ZERO TO LOW TARIFFS on intermediate technology tools and
implements industries. As much as possible, importers
and exporters should be allowed together to finance
their commercial dealings through private means without
our government being the sweet deal-maker. That way,
as one observer recently put it, (paraphrasing now)
our "earned petrodollars will not simply continue to be
recirculated into the world economy through the hands of
private sector importers."

(4) sharply revise the national budget to invigorate agriculture
and infrastructure development, promote massive employment, even if
it means certain other things must suffer for a while. Strict
insistence on transparency and accountability will also reduce
corruption and its attendant high cost of transactions in the
country.


Our currency crisis is grave, and patriotism is certainly not enough
to shore our currency up.


END

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Some related information:

On The US Federal Reserve Latest action


http://washingtonpost.com/wp-srv/business/shoulders/fedratepopup.htm
When Rates are Raised
How A Fed Rate Increase may affect consumers, business and markets

http://www.washingtonpost.com/wp-
srv/business/shoulders/fedratetimeline.htm
Rate Changes Federal fund rates beginning with the latest and ending
with
July 1990, the month the last recession began.

http://www.federalreserve.gov/boarddocs/press/General/2001/20010418/de
fault.htm
Federal Reserve Press Release
Release Date: April 18, 2001

http://washingtonpost.com/wp-
dyn/business/specials/federalreserve/A32700-2001Apr
18.html
Fed Surprises Market With Half-Point Rate Cut
By John M. Berry
Washington Post Staff Writer
Wednesday, April 18, 2001; 12:54 PM


US Newspaper Reactions

ttp://www.washingtonpost.com/wp-dyn/articles/A47160-2001Apr21.html
Did Fed Hit the Brakes Too Hard, Too Late?
Greenspan Defends Policy Against a Chorus of Criticism
By John M. Berry
Washington Post Staff Writer Sunday, April 22, 2001; Page H01

http://www.washingtonpost.com/wp-dyn/articles/A33912-2001Apr18.html
Heeding Economic Danger Signs
By Steven Pearlstein Washington Post Staff Writer
Thursday, April 19, 2001; Page A01

http://www.latimes.com/business/updates/lat_fed010419.htm
Fed Trims Rates in Bold Move to Avoid Recession
LA Times

http://nytimes.com/2001/04/19/business/19ECON.html
April 19, 2001 News Analysis: Is the Fed's Action Just in Time or Too
Late?

http://www.nationalreview.com/kudlow/kudlow041801.shtml
Fed Back from the Dead; Rate cut is a much-needed dose of shock
therapy.
April 18, 2001 4:50 p.m.


Some figures of US Interest rates

Treasury 4/18/01 Week Ago Year Ago

Three-month bill 3.75% 4.13% 5.79%
Six-month bill 3.82% 4.18% 5.99%
One-year bill 3.83% 4.22% 6.06%
Two-year note 4.24% 4.44% 6.36%
Five-year note 4.80% 4.85% 6.23%
10-year note 5.28% 5.25% 5.99%
30-year note 5.79% 5.68% 5.83%

Source: Bloomberg News via Washington Post

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On Nigeria, the Fall of the Naira and Central Bank actions

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Nigerian president, bankers meet on currency drop
Date: Thu, 12 Apr 2001 17:57:24 EDT

ABUJA, April 12 (Reuters) - The naira currency resumed trading in Nigeria
on Thursday following a two-day closure of the local forex market but a
meeting about the troubled currency between government officials and
bankers failed to calm market nerves, banking officials said.

"I will not sit down here and allow Nigeria to hemorrhage to the point of
death on the altar of liberalisation," President Olusegun Obansanjo said
in a statement issued after the meeting. "There will be no runaway
devalution here."

The central bank suspended forex trading in Nigeria on Tuesday after the
naira fell to 115.7 against the dollar from 110.7 the previous session.
The naira stayed at 115.7 through Thursday's trading. The slide has caused
a crisis that threatens the heart of Obansanjo's macro-economic policies
on which Nigeria depends for a debt rescheduling deal with foreign
creditors.

Bankers who were expecting a clear policy decision on how to prop up the
naira after a devaluation of 4.5 percent in two days said they left the
meeting disappointed.

"The meeting was more of the government using moral persuasion to resolve
the problem of the naira, which was not really caused by banks but by the
poor production level of the economy," said a bank chief executive who was
at the meeting.

"As long as the problems of poor power generation and supply is not taken
care of, as long as the roads are still very bad, and cost of doing
business in the country remain high, the naira will continue to lose value
against other currencies," the chief executive said.

SURGE CONTINUES

Obansanjo told bankers to show "greater patriotism by refusing to engage
in speculative trading" and assured them that the government had enough in
its cash reserves of more than $9 billion to fund all legitimate demand,
the statement said.

Despite his assurances, demand for foreign exchange continued to surge
with $174.4 million traded within a few hours after the meeting. Since
Tuesday volume in the forex market has been around $419 million, more than
double the central bank's weekly average demand projections of $185
million.

Bankers and industry analysts attributed the huge forex demand to a sudden
release of 158 billion naira in central government revenue allocations to
state governments and corporations last Friday.

POLICY SHIFT

Analysts say the root cause of the naira's problem was a major shift of
policy which allowed state governments and corporations to bank with
commercial banks rather than with the Central Bank. This had led to
periodic liquidity problems the Central Bank had difficulty controlling.

The intermittent floods of budgetary allocations that enter the
commercialbanking system is compounding the liquidity problem at the heart
of the naira.

State governors have been widely accused of misusing those deposits to buy
hard currency to pay for imports and other obligations, which has added
pressure to the naira.

Analysts say commercial banks are sitting on huge amounts of this
government money and are now preoccupied with foreign exchange at the
expense of lending to the productive sectors of the economy such as
housing, transport and food production.

The devaluation comes as the Paris Club of creditor nations is due to
decide by April 15 whether to confirm a debt relief deal for Nigeria.

The Club agreed in December to reschedule $23.4 billion of Nigeria's
official debt, most of it in interest arrears, provided Nigeria maintained
a satisfactory economic record with the International Monetary Fund.

---

http://allafrica.com/stories/200104090135.html
Foreign Trade And Exchange Policy Measures for 2001
Vanguard (Lagos) April 9, 2001

http://allafrica.com/stories/200104100195.html
Ifem: Naira Loses N2 As Demand Hits $138.9m
This Day (Lagos) April 10, 2001

http://allafrica.com/stories/200104110168.html
Naira Depreciates Further By N3 At Ifem Forex
This Day (Lagos) April 11, 2001

http://allafrica.com/stories/200104110134.html
Crisis Hits the Naira - Loses N5 in Two Days
This Day (Lagos) April 11, 2001

http://allafrica.com/stories/200104150107.html
Battle For The Soul Of The Naira Shifts To Government House
allAfrica.com April 12, 2001

http://allafrica.com/stories/200104130166.html
Central Bank Moves to Shore Up Unstable Naira
Panafrican News Agency (Dakar) April 13, 2001

http://allafrica.com/stories/200104190327.html
Central Bank Suspends Nine Banks From IFEM
Panafrican News Agency (Dakar) April 19, 2001

http://www.vanguardngr.com/16042001/sb122401.htm
Nigeria still can't compete in global market-Obi, MAN boss
SUNDAY VANGUARD : Business SUNDAY, 22nd APRIL, 2001

http://www.ngrguardiannews.com/business2/bn819318.html
Addressing inflation, liquidity, exchange and interest rates
simultaneously won't work, says Obla
Guardian Sunday, April 23, 2001

http://www.ngrguardiannews.com/magazine/mz819205.html
Guardian Sunday, April 22, 2001
Worries Over Value Of The Naira

http://www.ngrguardiannews.com/magazine/mz819208.html
Sunday, April 22, 2001
'The Naira Should Be Protected'

http://allafrica.com/stories/200104240214.html
Industrial Capacity Utilisation Drops By 2.9% Industry
This Day (Lagos) April 24, 2001

"The nation's industrial capacity utilisation has dropped again to 29 per
cent despite the efforts of the Obasanjo administration to revitalise the
real sector in the past 15 months --- The council of MAN was so worried
about the worsening macro-economic indicators, especially the interest
following the adoption of 21.5 per cent and the depreciation of the naira,
that it resolved to write the Federal Government to reconcile the
worsening situation of the economy with its budget promises."

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Interest Rates in Nigeria 4/20/2001

91-day T-bill 17.21%
MRR 15.5%

NIBOR Nigeria Inter-Bank Offered Rates
7 day 20.5%
30-day 23.0%
90-day 23.6%

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Naira Exchange Rates (1970 - 2001)
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In this Year 1 US Dollar Exchanged for 1 Pound Sterling Head of
Naira for Naira State

1970 0.7143 1.7114 Gowon
1971 0.6955 1.7156 "
1972 0.6579 1.6289 "
1973 0.6579 1.6289 "
1974 0.6299 1.4795 "
1975 0.6159 1.3678 Gowon/Mohammed
1976 0.6265 1.1317 Mohammed/Obasanjo
1977 0.6466 1.1671 Obasanjo
1978 0.6060 1.2238 "
1979 0.5957 1.2628 Obasanjo/Shagari
1980 0.5464 1.2647 Shagari
0.9 PMER
1981 0.6100 1.2495 "
1982 0.6729 1.1734 "
1983 0.7241 1.1216 "
1984 0.7649 1.0765 Buhari
1985 0.8938 1.1999 Buhari/Babangida
1.7 PMER
1986 2.0206 2.5554 Babangida
3.9 PMER
1987 4.0179 6.5929 "
5.9 PMER
1988 4.5367 8.0895 "
6.7 PMER
1989 7.3916 12.0695 "
10.7 PMER
1990 8.0378 16.2419 "
9.3 PMER
1991 9.9095 17.4955 "
6.7 PMER
1992 17.2984 27.8684 "
21.9 PMER
1993 22.3268 33.2522 Babangida/Abacha
56.8 PMER
1994 21.8861 33.4252 Abacha
71.7 PMER
1995 21.8861 34.7111 "
78.3 PMER
79.8955 AFEM 127.66 AFEM
1996 21.8861 35.7368 "
81.8 PMER
84.5750 AFEM 135.90 AFEM
1997 21.8861 35.7368 "
84.7 PMER
84.7004 AFEM 136.60 AFEM
1998 21.8861 35.7368 Abacha/Abubakar
88.0-90.0 PMER
85.0004 AFEM 136.00 AFEM
1999 (July) 85.9800 137.4680 Obasanjo
105.0 PMER
94.88 AFEM 145.71 AFEM
2001 April 115.7 Obasanjo
140 PMER

PMER (Parallel Market Exchange Rate or "Black" Market)

AFEM (Autonomous Foreign Exchange Market); official dual exchange rate
started in 1995, and abolished in 1999.


Price History of PMS (Premium Motor Spirit or "Petrol")
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YEAR PRICE/litre (Head of State)
that changed
last price
1985 20k
1986 39.5k (Babangida)
1989 70k (Babangida)
1993 N5.00 (Sonekan)
1993 N3.25k (Abacha)
1994 N11.00 (Abacha)
1998 N20.00 (Abubakar)
2000 N22.00 (Obasanjo)
1988 42k (Babangida)
1988 60k (Babangida)
1989 70k (Babangida)
1993 N5.00 (Sonekan)
1993 N3.25k (Abacha)
1994 N11.00 (Abacha)
1998 N20.00 (Abubakar)
2000 N22.00 (Obasanjo

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