Nigeria, Africa’s largest economy, presents a fascinating yet complex economic landscape, particularly when it comes to its currency, the Naira. For anyone engaging with Nigerian Money, whether for business, travel, or investment, understanding the nuances of its exchange rate system is crucial. This article delves into the intricacies of Nigerian money, exploring the parallel currency markets and their impact on the nation’s economy.
Earlier this year, a visit to Nigeria provided a firsthand look at the realities of its dual exchange rate system. Despite the official floating of the Naira, a significant disparity persists between the official exchange rate and the rate obtainable in the parallel or black market. This divergence profoundly affects daily transactions, business operations, and the overall economic health of Nigeria.
During my trip, the official exchange rate hovered around 315 Naira to one US dollar. However, inquiries in informal exchange settings revealed a starkly different picture. The unofficial, or black market, rate soared to approximately 465 Naira per dollar. This substantial gap, nearing 50%, highlights a critical distortion in the Nigerian money market.
To witness this firsthand, a small experiment was conducted. At a popular tourist location within the Eko Hotel on Victoria Island, known for its vibrant craft and souvenir market, an opportunity to exchange currency presented itself. Approaching a vendor, the request to exchange US dollars was met with immediate interest.
Initially offered a rate of 450 Naira per dollar, a brief negotiation led to an agreed rate of 470. Exchanging US$50 yielded 23,500 Naira – a considerably larger sum than would have been obtained through official banking channels at the prevailing official rate. This tangible difference underscores the powerful influence of the parallel market when dealing with Nigerian money.
The implications of this dual exchange rate system extend far beyond anecdotal experiences. For Nigerian importers, accessing foreign currency at official rates to purchase goods becomes a significant challenge. The scarcity of dollars in the official market forces many to turn to the parallel market at inflated rates, driving up import costs and contributing to domestic inflation. Investors, wary of the artificially overvalued official exchange rate and the Naira’s potential for further devaluation, are hesitant to commit capital.
This currency conundrum significantly contributes to Nigeria’s economic woes. Inflation has surged to approximately 18%, eroding purchasing power and impacting living standards. The International Monetary Fund (IMF) has projected a contraction of 1.7% for the Nigerian economy, painting a bleak picture of stagflation – the unwelcome combination of high inflation and economic stagnation.
Several factors underpin the Naira’s depreciation. Nigeria’s heavy reliance on oil exports for government revenue and foreign exchange earnings makes it vulnerable to global oil price fluctuations, a factor largely beyond its control. However, the widening chasm between official and parallel market rates is primarily a consequence of the government’s attempts to manage the exchange rate, clashing with fundamental market forces of supply and demand. The experiment in currency exchange vividly demonstrated the dominance of market forces over policy dictates. Unsurprisingly, official foreign exchange trading volumes have plummeted as the gap between market and official prices widens, indicating a lack of confidence and participation in the official system.
The International Monetary Fund expects the Nigerian economy to shrink 1.7% this year.
Nigeria’s current economic challenges and currency management dilemmas are not entirely new. President Muhammudu Buhari faced similar pressures during his leadership in the 1980s. His refusal to devalue the Naira then, as part of an IMF structural adjustment program, preceded a military coup that removed him from power. Now, democratically elected, he grapples with similar, if not more complex, economic realities.
Finding a path to sustainable economic reform is critical for Nigeria. Historically, the “Washington Consensus,” emphasizing market liberalization, privatization, and fiscal austerity, was a dominant economic prescription. However, the global financial crisis and its aftermath have cast doubt on the universal applicability of these principles. Even the IMF has acknowledged that austerity and rapid capital account liberalization can have detrimental effects, potentially exacerbating instability, hindering growth, and increasing inequality. The recognition that a “one-size-fits-all” approach is inappropriate for diverse economic contexts has gained traction.
Nigeria’s current policy response reflects a nuanced approach, seemingly embracing elements of both state intervention and market mechanisms. Instead of austerity measures, infrastructure spending has been increased to stimulate economic activity. Simultaneously, the government has intervened in the currency market to manage exchange rates, rather than allowing a completely free float. Conversely, there are also plans to privatize state assets, including presidential aircraft and energy holdings, and efforts are underway to attract foreign investment, particularly in infrastructure development through public-private partnerships.
This mixed approach was succinctly summarized by Nigeria’s finance minister, who, at an IMF/World Bank meeting, asserted, “we have our own local remedy” for Nigeria’s economic challenges.
“We have our own local remedy”—Nigerian finance minister
However, within Nigeria’s business community, the prevailing sentiment leans towards greater market liberalization, infrastructure investment, and reduced bureaucratic impediments. Aliko Dangote, Africa’s wealthiest individual, has advocated for the sale of state assets and leveraging international loans to raise the substantial capital needed for economic revitalization. Bola Onadele, CEO of Nigeria’s securities exchange FMDQ, has called for a complete float of the Naira, believing it essential for market efficiency and transparency.
The parallel market dynamics observed in Lagos bear a striking resemblance to Argentina’s experience in late 2015. Argentina’s “blue market” dollar rate significantly deviated from the official rate, creating unsustainable economic distortions. Following a shift towards more market-oriented policies, Argentina removed capital controls in December 2015. This move, coupled with business-friendly reforms under President Mauricio Macri, has attracted international investors and spurred economic recovery. The IMF projects Argentina’s economy to grow by 2.8% in 2017, and Argentine equities have rallied, indicating renewed investor confidence.
Nigeria, like Argentina, may need to undergo the challenging but necessary process of fully floating its currency to achieve long-term economic stability. While this could trigger short-term inflationary pressures, potentially even hyperinflation, historical precedents, such as the Asian Financial Crisis, demonstrate that countries embracing market-based reforms can emerge stronger in the long run, achieving high growth and robust economic performance.
Navigating these transitions requires careful consideration of short-term pain and potential social and economic instability. Policymakers must acknowledge the unique local context and avoid applying rigid, formulaic solutions. The path forward for Nigerian money and the Nigerian economy hinges on finding a balanced and context-specific approach to reform.
Vikram Mansharamani is the President of Kelan Advisors, LLC and the author of Boombustology: Spotting Financial Bubbles Before They Burst(Wiley, 2011). To learn more about him or to subscribe to his free mailing list, visit his website. He can also be followed on Twitter @mansharamani or by liking his Facebook page.
