Facing a brutal insurgency from Boko Haram, rampant corruption and an oil price crash that has devastated the country’s main export, Nigeria’s economy is up against its most serious crisis in a generation. There is not much that can be done, given the entrenched and interlocking nature of Nigeria’s problems, but both Nigerian and foreign investors don’t have a lot of confidence in the policy mix the government is trying. The currency, the naira, is in free fall; that matters to Nigerians because the country has huge import needs—including the need in this oil rich country to import refined fuel. As the Financial Times reports:
Tight currency controls introduced by the central bank last year to conserve foreign reserves have left everyone scrambling for dollars, driving the naira’s value down still further.
“Dollars are not circulating and the naira is worthless,” said Abdu, a black-market money trader, manning his post near a tourist hotel in Lagos and holding a large plastic sack of 500 and 1,000 naira notes. “What I used to buy for 10 naira costs me 200. I want the dollar to go down but it keeps climbing.”
Businesses that cannot source dollars for imports because of restrictions put in place last year are laying off workers. So are banks.[..]
The chief concern among the local business community and foreign investors is the president’s endorsement of central bank governor Godwin Emefiele’s widely criticised currency and foreign exchange management policies.
These are aligned with the president’s broader aims for the economy, namely cutting imports and tightly controlling official forex flows. The official band, adopted almost a year ago, remains at 197 to 199 per dollar.
But the de facto dual currency system suggests that devaluation is inevitable, according to economists and investors.
As we have written before, Nigeria is in many ways a condominium of tribes, religions, and cultural groups, many large enough to be their own countries elsewhere in the world, that has historically been kept together first by outside rule and then by oil wealth. As the economy falters, friction between the Muslim North and Christian South (not to mention Biafra) increases; conversely, as the economy falters, there is less funding for the central government to keep the country together—for instance, by repressing the Boko Haram insurgency in the north. Under these circumstances, an economic policy that exacerbates the problem is bad news.