History and wisdom call for fixed exchange rate
The Nigerian economy experienced three major shocks in recent time. The first one was the fall in global crude prices from over $100 to below $50. The second shock was the increase in pump price of petrol from N97 to N145. The third one was the so-called accelerated depreciation of the Naira from about N150 to the United States dollar to about N500 to the dollar within the past six months through the mandatory foreign exchange market (MFEM).
The fall in global crude petroleum price can be described as uncontrollable shock. The other two are controllable and avoidable. But Nigerian economists and other social scientists managing the economy decided not to reason and allowed the Nigerian economy to receive the three shocks. Recently, the Central Bank Governor, Godwin Emefiele, said the CBN would continue to auction the available dollar because Nigeria still does not have enough dollar to meet demand. This article argues that planning in a nation should be aimed at preventing an economy from receiving the full impact or reducing the impact of shocks that derail planned growth and impose unnecessary stress on the people and economy. This article also presents historical and logical evidence to support the reasoned and thoughtful position that Nigeria will be better off adopting sensible fixed exchange rate for a minimum of one year, instead of operating the MFEM – a route that may lead to a dangerous national crisis soon.
The First World War started in 1914 and ended in 1918. The opposing groups that fought the war were the Allied powers led by the United States of America, Britain, France and Russia; and the Axis led by Germany, Japan and Italy. The Allied powers won the war. The Allied powers therefore demanded $33 billion from Germany as war reparation (Stolper, et al., 1967; and Glahe, 1977). Germany did not have the money. Consequently, the Allied powers forced Germany to sign the Treaty prepared in Versailles, which contained the MFEM machinery – a punitive mandatory devaluation tool. The German mark which exchanged 4.2 units to the United States dollar in 1919 was devalued through the MFEM to 63 marks to the dollar in 1920. In 1921, 200 marks exchanged for one dollar. In 1922, 2000 marks exchanged for one dollar.
The German mark collapsed in 1923; it exchanged 4.2 trillion to the dollar (Hapur, 1982). Putting the situation in another perspective, One German mark exchanged: 23.8 United States cents in 1919, 1.6 cents in 1920, 0.5 cent in 1921, 0.1 cent in 1922 and 0.0 cent in 1923. The MFEM did not produce a realistic exchange rate for the German mark. Germans and Germany were disgraced. Germany was a world power. The Germans demonstrated their strong will as a people. They abandoned the punitive programme in 1923. The Commissioner for National Currency, Hjalmer Horace Greecy Schact, promptly stopped printing the old mark and issued a new currency (the Rent-mark) that was equal to one trillion old mark. At the time the punitive programme was stopped in November in 1923, price level had risen by a factor of 10.2 billion and money supply had increased by about 7.32 billion times (Cagan, 1956).
Why did the economy of a world power crumble in just four years? It is because of the nature of the mandatory foreign exchange market. Germany lost a world war. The Germans were in great anxiety as to what the enemies would do to them. What should the Germans expect? The introduction of the MFEM confirmed the fear of the Germans that they were in real trouble. Money is normally considered a means of exchange and a financial asset, a form of saving, that is, readily usable purchasing power ( Mckenzie and Tullock, 1978). Traditionally, money is seen as means of exchange; money is used to acquire commodities; money is itself not a commodity. In determining the exchange rates between national currencies, many factors are involved. An important factor is national prestige – many great nations do not allow their currencies to fall outside certain limits, so, governments intervene in determining exchange rates.The state of convertibility of a currency, that is the extent a currency is the basis of transacting a non-negligible proportion of global trade influences exchange rates. Currencies like pound sterling, the United States dollar and Japanese yen, are convertible currencies; they only fluctuate within certain limits.
The supply-demand relationship of a currency in a nation – the amount of dollar Nigeria earns in the year (productivity of Nigeria), for example, affects how many units of the Naira exchange for one United States dollar. Exchange rate also depends on national trading strategy. For example, if a nation produces many manufactured goods to sell to other nations, it could wisely adopt a low exchange rate so that its goods would look cheap to the buying nations and the productive nation can sell large quantities of goods abroad. So, exchange rate is not determined by any single factor. Exchange rates are usually determined without the knowledge of the public. However, when a MFEM is either established as a punitive measure in a productive nation or naively established in an unproductive nation as solution to low productivity and lack of foreign currencies, money is then converted into a tradable commodity of rapidly increasing demand and rapidly decreasing supply because production is discouraged while speculation becomes the preoccupation of all citizens.
Speculation destroys all production activity-linkages because of sudden increase in prices. In a highly speculative environment, no one has time for growth activities – learning and production, because they take time and they do not produce large amounts of return, quickly. In the case of Germany, speculation grew very rapidly, raising price levels and money supply billion times in four years. In Nigeria and other African nations, the exchange rate of the national currency vis- a-vis the dollar and inflation are increasing continuously and imposing unnecessary stress on the people and the nations. This will continue till confusion sets in like it happened in Germany.
What the experiences of Germany and African nations have demonstrated is that the MFEM is machinery that destroys a nation, it should be abandoned by Nigeria and other African nations now before confusion sets in. Nigeria lacks the ability to determine the actual amounts of dollar the nation needs in the year. The rich Nigerians, the parasitic Manufacturing Association of Nigeria (MAN), the telecommunications companies, the oil and gas exploration and production companies make fraudulent demand of dollars. This unknown, uncontrollable and indeterminable factor should not prompt Nigerians to adopt a programme that would surely ruin Nigeria.
Nigeria should adopt sensible fix exchange rates that must be in place for a minimum of one year and set priority for allocating foreign currencies. These would reduce speculation drastically, allow Nigeria to plan and begin to build the learning and production linkages that have been destroyed since the Structural Adjustment Programme (SAP) and its mandatory foreign exchange market were adopted in 1986. It is improvement in productivity that can lead to higher earnings of dollar, not auctioning of dollar.