Emerging Markets Weekly Blog Post 26/4/16

In a recent article, the Australian sociologist Salvatore Babones made the following observation: “Many developing countries have chosen economic stagnation rather than erode the spending power of their wealthiest citizens.” This struck me as a particularly interesting observation, because it confirms the suspicion I have held for some time now about the economic policies being pursued by Nigeria’s President, Muhammadu Buhari.

Over the past year, he has insisted that the Nigerian currency, the naira, remain fixed at an exchange rate of N199 to the dollar. This is despite the fact that the country has been badly affected by the commodities crash, particularly the price of crude oil. The real value of Nigeria’s exports has plummeted, making the country’s terms of trade much worse. On a free market, this would have resulted in the a steep devaluation for the naira, but Buhari did not allow this to happen. Instead, he stepped in and set a fixed exchange rate for the naira, a policy which has been roundly criticized by the IMF and most Western economists. In classic economic theory, by allowing the naira to devalue, the country could have made its other exports more attractive and hence aided in the rebalancing of the economy.

It is worth noting that the freezing of the naira has created a black market rate for the currency. On the black market, you can get N320 for one dollar, which shows that the currency has devalued by over 50% on the streets. This hints at the enormity of the economic problems facing Nigeria. But it also hints at a possible explanation for the real motives of Muhammadu Buhari. If he allowed the naira to find its ‘true’ level, it would likely settle at around N300 to the dollar. For the famously venal and corrupt Nigerian ruling class, that would wipe out 50% of their naira-denominated wealth overnight. This brings us back to the observation made by Babones: “Many developing countries have chosen economic stagnation rather than erode the spending power of their wealthiest citizens.” Is it possible that the true reason that Buhari has thumbed his nose at economists is because he is protecting the fortunes of the Nigerian elite?

As recently as April 21, Buhari has dug in his heels and refused to consider a devaluation of the naira. He explained in an address from the Presidential villa in Abuja (the new capital) that he is not disposed to the devaluation of the naira, as being canvassed in some quarters, because the previous exercise of this option failed to benefit the nation and the generality of Nigerians. So he claims that he is acting in the best interests of ordinary Nigerians in refusing to let the currency find its true level. But what is the evidence that a fixed naira rate has protected Nigerians from the effects of the currency crisis?

Buhari has repeatedly claimed that devaluing the currency would cause inflation in the price of daily foodstuffs of the poor. However, that is already happening under his own policies. Inflation accelerated to an almost four-year high of 12.8 percent in March as manufacturers struggled to pay for imports. At the Mile 12 market in Lagos last week, a basket of tomatoes, which previously cost N6,000 now goes for N14,000. Tatashe and chilli pepper now cost N7,000 and N5,500 respectively, as against the N4,500 and N5,000 they sold for two weeks ago. Inflation is already lifting off in other words, driven in part by the fuel scarcity. In addition to inflation, Buharis’s policies are also creating food shortages. There are now shortages of goods from gasoline to milk. None of this can be said to be good for ordinary shoppers. Therefore, it seems that darker motives are underpinning the policies of Buhari.

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