The United Kingdom, the Sterling area operations, and reserve management in Nigeria: the politics of the Sterling Guarantee Agreement (1931–1979)

From a historical perspective and using a country-specific case analysis, this paper examines the claim that, under a bilateral or multilateral arrangement, a country’s monetary system unwittingly causes frustrations in the monetary management of other countries. It explores the dynamics of Nigeria’s relationship with the UK throughout the Sterling Area regime and documents the diplomatic reactions of Nigeria to the variations in the role of the sterling as a reserve currency. The paper shows that attempts by Nigeria to optimize the benefits of her membership were scuttled by mutual suspicion, a lack of requisite central banking capacity, and fiscal recklessness. On the one hand, Nigeria benefited from the Sterling Area operations by gaining easier and cheaper access to British capital markets. On the other hand, despite the efforts of the Nigerian government to adjust to the changing sterling realities, the country’s internal capacity constraints and sub-optimal choices ended up undermining her reserve management system, while also serving as a significant source of frustration to the British monetary authority.