Nigeria Changes Course with Painful Devaluation


Nigeria has lost a year. By imposing capital controls and sticking mulishly to a fixed exchange rate out of sync with the shifting fortunes of the economy, President Muhammadu Buhari eroded the independence of the Central Bank of Nigeria, dented the confidence of investors and came close to breaking many domestic businesses dependent on imported inputs. His misguided bid to prop up the currency in the interest of the poor when the price of oil, the main export earner, had collapsed, pushed capital out of the country.
So, Wednesday’s decision by the CBN to float the naira came later than it should have and at a price that was needlessly high. It was also accompanied by a questionable move to limit the number of primary traders with access to foreign exchange at the central bank. The regulator is effectively establishing a cartel of favoured banks and, even if unintentionally, creating avenues for price-fixing among them.

The CBN has nevertheless gone much further than expected towards liberalisation. By doing so, it has removed the main barrier to inward investment and potential economic growth. It has also moved to curtail opportunities for currency fraud which had undermined Mr Buhari’s otherwise robust campaign against the scourge of Nigeria: corruption.
His administration, elected on a wave of hope last year, has proved thus far to be close to the antithesis of the one he replaced. The laissez-faire attitude of his predecessor, Goodluck Jonathan, allowed some aspects of business and the arts to flourish. But the better policies of his day were overshadowed by the rampant theft of oil revenues and attendant erosion in state finances and the rule of law.
Mr Buhari, an austere former general who served as military head of state in the 1980s, has an unprecedented mandate from the electorate, thanks partly to his reputation for personal integrity. He has a statist mindset and his ambition, along with that of some of his closest allies, was to engineer a shift from the unbridled crony capitalism of recent years to a more state-driven model for promoting industry and jobs. He has stamped on grand corruption, but undermined efforts to sanitise public finances and restore integrity to the state with retrograde policy choices that have helped push Africa’s largest economy into contraction for the first time in many years.
The decision to allow the naira to devalue, and an earlier one to eliminate fuel subsidies, show a new willingness to face up to tough choices. They also suggest Mr Buhari may be stepping back from a frontline role in economic policy and allowing his cabinet more leeway to set the agenda. The adjustment associated with these moves will be painful. The naira will devalue sharply, inflation will probably spike and the CBN may have to respond by hiking interest rates. Longer term, the economy should begin to right itself.
Short-term public finances are still in crisis. As a result of sabotage by resurgent militants in the oil-producing Niger delta, Nigeria has been losing around 700,000 barrels per day of oil. This, and the fall in oil prices since 2014, mean that the state is operating with a quarter or less of what it earned two years ago. To plug the gap, the government deserves help from its allies abroad with the recovery of billions of dollars looted under past administrations, much of this now stashed in foreign banks and assets. The welcome change of course in exchange rate policy will reduce the budget deficit — via devaluation. It also eliminates an obstacle to the multilateral financing that Nigeria needs.

•Culled from Financial Times