Nigeria is one of the powerhouses of Africa, with a strong international profile. Ask any Westerner to name an African nation, and you can be sure that Nigeria will be one of (if not the) first to be mentioned. As a consequence, Nigeria has attracted a lot of welcome foreign investment over the last few years, which has caused something of an economic boom. Nigerian business has benefited greatly from this – despite political problems. However, recent developments may indicate that advance has come rather too fast, and the speed at which the economy has grown has left little time in which to shore up and protect the nation’s economic status. The plummeting prices of oil and a burgeoning instability with local currency the Naira is leading many Nigerian commentators to wonder if our economic boom was a metaphorical house of sand, about to crumble on its unsteady foundations.
The Oil Effect
The oil industry has always been one of boom and bust – but the downturn currently afflicting the industry is the worst for almost thirty years. A combination of factors has led to a slide in prices which is proving catastrophic for many related interests all over the world. With its enormous profits and many controlling interests, the oil industry is one of few which can alter the economic state of the entire world, and Nigeria in particular is currently feeling its effects. Nigerian and Saudi oil, once sold almost exclusively to the United States, is now branching out into other markets – and the action of market forces has thus caused competitors to drop prices in order to seem more appealing. This benefits motorists and those who routinely buy oil, but hits oil producing countries which may rely upon oil to underpin their economies hard. Many believe that oil prices will naturally recover as production slows – but others fear that this recovery will come too late for many Nigerians.
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Slide Of The Naira
Understanding the serious impact the declining oil prices could have upon the Nigerian economy, the Central Bank Of Nigeria have issued a series of regulations designed to protect the Naira and reduce the potentially destabilising impact of foreign currency upon Nigeria’s own finances. They have also devalued the Naira to bring it in line with the international and internal economic situation, and to prevent such harmful economic phenomena as hyperinflation. Unfortunately, this has not translated well onto the streets – where the practical value of the Naira is higher than the banked value of it, leading a lot of people to make rather a lot of money in a very short space of time. What the CBN is trying to do may be admirable – to bolster and insure the currency against the vagaries of the market – but in reality a more advanced economic infrastructure is required if the currency is to withstand the storms of international finance. Just like a business without insurance, the currency is very vulnerable to financial shocks and buffets. The Nigerian currency needs to be able to stand on its own two feet – which will take a good deal more controlled and progressive economic development.
Economic Diversification
If the Naira is ever going to become a world-beating currency, able to compete against the dollar, the pound, and the yen, it will need to be able to test itself in the international market. Without foreign interchange of currency, the Naira will be unable to strengthen itself and flex its muscles in the currents of international finance. While CBN intervention has occurred for the best reasons, the economic reality is that the Naira is already vulnerable to the vagaries of the international market (as the disparity between its banked and street value demonstrates). Surely it is better to give the Naira its head and let it fight its own battles rather than to coddle it within the ‘safe’ environs of Nigeria? The CBN is scared that Nigerians will turn to other currencies if the Naira is allowed to fall against the dollar and its compatriots – but this is precisely what will happen should the Naira become a ‘toy’ currency used only by Nigerian dignitaries and nobody else. Oil prices will recover, and when they do so Nigeria must take pains to set up a strong, solid economic infrastructure which will allow the Naira to float freely upon the international economic markets.
This was contributed by Eve Noble for Tekedia.