It isn’t difficult to see the myriad growing problems that has besieged this nation, with inflation at record levels and a growing foreign backed Sunni insurgency dominating its interior, Nigerian officials have decided to tackle an ominous problem: the medium of exchange.
Nigeria’s Central Banker, Godwin Emefiele tried to manage his economy after watching his nation states primary commodity, oil, sink to levels that produced a balance of payments crisis that has wrecked the economy while engendering black markets.
The Nigerian currency, the naira, used to account for nearly 90% of the countries export earnings. With plummeting commodity and oil prices, global suppliers haven’t delivered any relief to undifferentiated political economies, and numerous nations states like Nigeria and Saudi Arabia, struggle to manage their economies out from nominal fixed exchange rates tied to commodity extraction. Now the Saudi’s have a competitor, for they seek to float the currency against the U.S. dollar.
The Central Bank tried to conserve quickly eroding domestic foreign exchange reserves by banning the import of goods; the thought was to ration the supply of dollars, its impact was the explosion of black markets. Others like Kazakhstan, Angola and Russia all permitted their currencies to slide if only to assist the pace of their exported commodity.
While Nigeria sought to defend its peg of the naira to the U.S. dollar at 197, importers dropped their overt relation with the Central Bank, instead favoring forex black markets. The result: empty shelves across Nigeria. Inflation has soared past 16%, FDI disappeared and domestic factories closed. On June 15, Nigeria’s Central Bank publicly proposed that it will float the naira to find and hold parity.
It will probably work. A flexible interbank exchange-rate will welcome massive FDI, the sine qua non for sound monetary, fiscal policy.