Democracy, Trade, and Economic Growth: The Challenge of Managing Foreign Exchange in Nigeria

Introduction

May 29th of every year marks Nigerian democracy day. Before May 29th 1999, Nigeria had experienced prolonged military rule for most of its independence period. The other periods of democratic rule in Nigeria are 1960 to 1966 and 1979 to 1983. Around the world, democracy has gained wide acceptance when compared with what was obtainable decades back (Guseh and Oritsejafor, 2007). Nigeria and Africa are not left behind in embracing a democratic system of governance. The democratic system of governance is associated with a reduction in arbitrariness, policy continuity, protection of property rights, human rights, freedom, free market, community development, consensus and human development (Sen, 1999; MacEwan, 1999). Along this line, democracy has been classified as the best system of governance over dictatorship and another authoritarian form of governance. According to Sen (1999), political freedom can have a major role to play in providing incentives and information in the solution of acute economic needs. Adam Smith has famously emphasized the freedom inherent in a market economy which contrasts it with a planned economy. It is widely accepted that economic development must champion human and social development for it to be democratic. Thus, democracy shall be the ultimate goal of economic development.

The over two decades of democracy may have been responsible for the growth of import in the Nigerian economy; where the urgency to win the election may have forced politicians to bow to electorate pressure, who desire cheaper import over costly domestically produced goods and services. This shall be viewed together with high population growth and the death of domestic industry. The amount of Nigerian imports has grown since the return to democracy, and so also has the deterioration in Nigerian foreign exchange. In any economy where import is higher than export foreign exchange will automatically deteriorate. Inflation may have also grown since the return to democracy, which also goes hand in hand with deterioration in foreign exchange and interest rates. Part of the inflation is caused by imported inflation from abroad, due to the high cost of import. But, at the same time, the banking sector, GDP, FDI and consumption may have grown exponentially. According to Fraj, Bouchoucha and Maktouf (2020), exchange regimes play an important role in decisions to strengthen political and economic stability. Recently, excessive borrowings and deficit budgeting by the Nigerian government have resulted in balance of payment problems. These have a direct connection with the foreign exchange problem. Under a democratic regime, people can protest the negative consequences of devaluation of currency; but this is difficult to do under non democratic regime. Generally, some democracies in Africa have proven themselves to be poor when it comes to controlling foreign trade; opposition from the people and fear of losing election makes it even more challenging. African countries such as Kenya, South Africa and Ghana have experienced currency deterioration in recent years.