Nigeria took a step toward economic sanity on May 24 by announcing plans to let its currency weaken. Africa’s largest economy is facing recession, and exchange rate flexibility will help it cope. For best effect, those plans should also include junking the foreign exchange controls that have blighted its businesses and scared off foreign investors.
Nigeria’s currency, the naira, has been pegged at about 200 to the dollar since March 2015 – a policy that President Muhammadu Buhari has defended. Oil exporters from Russia to Colombia let their currencies depreciate when the falling price of Oil hit their exchange receipts; Nigeria tried to shield consumers and businesses from inflation by propping up the naira and keeping imports cheap. It didn’t work. Inflation hit a nearly six-year high last month.
Restrictions on currency trading – importers of everything from wheelbarrows and glass to margarine and toothpicks were barred from buying dollars – led to shortages, with factories idled by lack of inputs. Insiders profited by trading dollars on the black market. Foreign investors, fearing an eventual drop in the currency, sold Nigerian stocks and bonds.
Devaluing the naira and dismantling foreign exchange controls won’t solve the country’s economic problems. In the short run, Inflation is indeed likely to rise. But avoiding an artificially overvalued currency is essential for repairing the country’s price system and making the economy more productive.
A correctly valued currency would make foreign investors more confident about putting their money down. It would make Nigerian non-oil goods more competitive both at home and abroad, building up both agriculture and industry. And dismantling currency controls would help to curb corruption and rent seeking. Those enormous benefits would last long after the costs of any initial shock had been forgotten.