C&B Notes

Nigeria Tries to Avoid Venezuela’s Fate

Across the Atlantic, Nigeria — boasting Africa’s largest economy by nearly 50% thanks to large oil & gas reserves — is suffering from many of the same ills as Venezuela.  Thanks to poorly conceived trade policies and detached-from-reality currency controls, airlines are abandoning the country, food shortages are widespread, and inflation is racing ahead.  Fortunately, Nigeria’s leadership unexpectedly announced this month that they would allow the country’s currency to float and settle at a market value.

Mr. Emefiele tried 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….

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.