Recently the naira surprisingly experienced a gain in value. But it was only because demand for the dollar inexplicably dipped. Imagine if buyers of Nigeria’s petroleum must first buy the naira in order to pay Nigerian National Petroleum Company Limited.
Kenya’s President William Ruto wonders, “Why (it is) necessary for Africans to buy things in Djibouti and pay in dollars,” though he suggests also, “Let’s pay in United States dollars what we are buying from the US. But what we are buying in Djibouti, let’s use local currency.”
He is excited that “Afreximbank has given (Africa) a mechanism where traders, in our continent, can trade their goods and services and Afreximbank will settle payments in local currencies,” as “Kenya champions the Pan-African Payment and Settlement System that is done by… Afreximbank.”
In the 1980s, some Nigerian students, including this writer, regularly exchanged their naira for the CFA at the Nigeria/Benin Republic border at Seme, crossed into Benin Republic and spent the CFA on shoes, clothes and other consumer items.
The same happens when Nigerian importers first purchase the dollar and present it to the vendors. It is the need to first buy the foreign currency that led to the idea of the exchange rate in the first place. But importers do not have to lug the naira across the border in sacks; the Central Bank of Nigeria and the correspondence banks now handle the exchange and payments.
Many, who swear by the received west-centric wisdom contrived by the Bretton Woods institutions, will wonder at the audacious suggestion that buyers of Nigeria’s petroleum should first buy the naira. And they are aided by Section 2(c) of the Central Bank of Nigeria Act 2007 which requires the CBN to “maintain external reserves to safeguard the international value of the legal tender.”
Section 24 provides that the external assets shall consist of gold coins or bullion; balance at any bank outside Nigeria; treasury bills of foreign countries; loans or debenture in foreign banks; and Nigeria’s gold tranche and Special Drawing Rights with the International Monetary Fund.
All these just go to fulfil the cardinal principle enunciated in Adam Smith’s book, “The Wealth of Nations,” whereby peripheral nations are compelled to accumulate foreign reserves to finance their imports.
Now, the most decorated African or Third World country theoretical economists defend it with all their credentials. They are aghast at the audacity of the suggestion to receive the Naira for the sale of Nigeria’s petroleum and other mineral resources.
Recall that investment banker and Edo State Governor Godwin Obaseki, consistently argues that Nigeria must promote export trade to combat forex scarcity. This is correct, but it further helps to entrench Adam Smith’s given wisdom to the advantage of the metropolitan economies.
You may recall, also, that CBN Acting Director of Corporate Communications, Hakama Ali, was so excited to tell everyone that the CBN was able to settle $7 billion foreign exchange backlog owed to foreign airlines, and that Nigeria’s foreign reserves (needed to fund imports) had risen to $34.11 billion!
After the Second World War, America found a clever way to supplant the gold standard, the traditional store of the value of every currency. Before that time, the more gold bars you had, the stronger will be your currency.
Currency evolved from promissory notes issued by goldsmiths to those who kept jewellery with them. With time, the promissory notes could be exchanged for commodities that the holders bought from vendors, who then redeemed them from the goldsmiths.
America suggested the fiduciary currency, or fiat cash, to replace the gold standard with the dollar. The inscription, “The King promises to pay on demand the sum of (X),” on the British pound, is the most apt way to demonstrate that the strength of the dollar is now based only on the integrity of the American government.
With this payment system, international trade became practically dependent on the American dollar. China holds the largest inventory of the American dollar, treasury bills and treasury bonds, because of this contrived narrative.
The second move that America made to consolidate its hold on the world economy was the assurance to support the rule of the House of Saud if Saudi Arabia would receive the American dollar for the sale of its petroleum in the international market.
America’s bet that other members of the Organisation of Petroleum Exporting Countries, of which Saudi is the big kahuna, will also trade their petroleum in the American dollar, worked big time.
When the petroleum business became the biggest trade in the world, the American economy was profiting from every dollar-denominated trade transaction in the world. See how the iteration algorithm works perfectly for America.
In February 1975, OPEC members panicked when the value of the American dollar, the currency of the international petroleum trade, suddenly dipped in value, depriving OPEC members of 10 per cent of their revenue. This suggests that the American dollar is not invincible after all.
The dollar could have been dumped if the OPEC member countries had so desired at that time. Algeria had actually advocated that OPEC member countries should stop accepting the dollar as payment for petroleum sales. But… something happened.
Rumour has it that BRICS–Brazil, Russia, India, China, South Africa and their associate member nations– are chewing on the idea of a BRICS currency, or blockchain payment system, that should pretty much operate like the euro of Western Europe.
If buyers of Nigeria’s petroleum must first acquire the naira, the increase in demand will upswing the value of the naira. The law of supply and demand says that when the demand for a good rises, (especially in the short-run when supply is inelastic), the price too will rise.
And, of course, now that no foreign country is asking to buy the naira, the value is either stagnant or falling. It gets even worse when irresponsible governments, like that of former President Muhammadu Buhari, keep printing the naira just to fritter on wasteful importation and financing of big government.
Those who will still ask how Nigeria will accumulate the dollar that it would need to pay for its own imports would seem not to have read the foregoing with a presence of mind. This arrangement does not preclude the dollar that you would have paid to acquire the naira that you needed to purchase Nigeria’s petroleum.
Paying the dollar for the naira through your correspondence bank in Western Europe or North America is immaterial. What matters is that, first, there was a demand for the naira, before the payment for the petroleum.
If the government adopts this (unusual) policy, it must keep its eye on the ball. Imagine the gains if anyone who wants to buy any of Nigeria’s mineral resources and cash crops has to first “buy” the naira.
After the Ukraine-Russian War broke out, Russia insisted that any Western European country that wanted to buy its gas must pay with the Russian rouble. And they had no choice but to comply.
While this policy won’t solely raise the value of the naira, it should substantially contribute to strengthening it. And if sustained over a long period, it should bring the naira into reckoning in the eco-system of international trade.
Of course, the West won’t like the idea and may seek to destabilise the government.