A slumping economy and high inflation prompt a much – needed reform
BARE shelves in supermarkets and soaring inflation would worry any central-bank governor. For Godwin Emefiele in Nigeria, the added twist is that both problems are partly his fault. The central bank’s policy of trying to maintain the value of the naira, Nigeria’s currency, in the face of a slump in the price of oil, which used to account for about 90% of the country’s export earnings, has failed miserably. Now it is being scrapped.
Mr Emefiele tried heroically to conserve the country’s dwindling reserves of foreign exchange. In effect, he banned the import of a huge range of goods, from tinned fish to toothpicks; arbitrarily rationed the supply of dollars from the central bank to importers; and threatened to clamp down on people trading dollars on the black market. Mr Emefiele maintained this policy even as other oil exporters such as Russia, Angola and Kazakhstan allowed their currencies to slide to make exports more competitive and to dampen demand for imports.
Despite the central bank’s best efforts to defend the peg of 197 naira to the dollar, it continued its slide on the black market, where a dollar costs more than 360 naira. Since most importers have to get their dollars on the black market, rather than through the tiny allocations released by the central bank, the price of almost everything in Nigeria has soared. In May annual inflation jumped to almost 16%.
Foreign investors have pulled back, and reserves have slumped. Factories have closed their rusty doors, shedding tens of thousands of jobs. In recent weeks airlines including United, an American carrier, and Iberia, a Spanish one, have stopped flying to Nigeria because they cannot take money from ticket sales out of the country. Ramming home the foolishness of the policy was the revelation that the economy shrank in the 12 months to March, its first contraction in over a decade.
On June 15th Mr Emefiele finally relented. After patting itself on the back for “eliminating speculators” (in reality only those with pals in the central bank had access to cheap dollars they could sell for a quick profit on the black market) and stoking domestic production (manufacturing contracted by 7% in the 12 months to March), the central bank explained that it would introduce a “flexible interbank exchange-rate market” starting on June 20th. If the currency is allowed to find its natural home, it may settle somewhere between 280 and 350 naira to the dollar, traders reckon.
Many people were surprised by the extent of the currency’s liberalisation after so much talk of the central bank introducing some sort of two-tiered exchange rate. Some see the hand of the president, Muhammadu Buhari, in the new policy. Mr Buhari had previously blocked proposals to devalue the currency, saying it would “kill” the naira and hurt the poor. Yet in recent weeks he has softened his stance, and is thought to have insisted that the central bank should go for a fully-floating exchange rate rather than some sort of dual rate, which would only have fuelled yet more corruption.
Even so, private-sector bankers are wary. They fret about lingering controls. The central bank says it will intervene in the market “as the need arises”. The new policy “sounds almost too good to be true,” says Alan Cameron, an economist at Exotix, a bond-trading firm in London. “Having seen so many false dawns in the past six months, I think many will need to see the new system operating before they believe it.”
But if Nigeria does what it says it will, it can expect a surge of investment. Some big private-equity firms say they have been eyeing up deals, but waiting for news on the currency. Nigeria will have an easier time borrowing $1 billion abroad to help meet a budget deficit of about 2% of GDP. A second quarter of negative growth looks inevitable, and with it a recession. But the worst may soon be over.