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How to save Nigeria’s economy and stop corruption 0

The collapsed price of oil is putting pressure on oil exporters around the world, from Canada to Kuwait.

But perhaps, no country is less prepared to survive prices at about $30 a barrel than Nigeria, which until a few years ago relied heavily on petroleum exports for its revenue. While countries like Saudi Arabia and Russia have saved past oil profits for rainy days, Nigeria has no such insulation. What’s worse is that Nigeria is especially dependent on imports of basic goods.

The cracks are starting to show: While the official rate doesn’t reflect it, Nigeria’s currency, the naira, is the world’s worst performing this year.

 The economic troubles could hardly have come at a worse time. Last year, Nigerians elected Muhammadu Buhari as president after he ran on a zealous anti-corruption platform. Unfortunately, Buhari’s insistence on maintaining the peg at the current official exchange rate is not only crippling production, it is also encouraging corruption. He should abandon it as soon as possible and allow the naira to devalue.

Nigeria has pegged the naira to the dollar for decades, adjusting the exchange rate according to international supply and demand. But even as Nigeria’s economy has faltered, since last spring, the peg has remained fixed at around 198.5 naira to the dollar. This rate is being maintained at the President’s insistence, undermining any notion of central bank independence.

To keep the rate fixed, the central bank has to preserve its foreign currency reserves, a difficult task as oil export revenue has fallen. How does it do that? By making it more difficult for Nigerians to obtain hard currency at the official rate. Primarily, the central bank has restricted access to foreign currency to importers who can demonstrate that the goods they’re bringing into Nigeria are necessary.

But Nigerians are innovative. A large parallel currency exchange has taken shape, in which importers trade naira for dollars at up to twice the official rate. The trade is too blatant to be called a black market. Last month, for example, I saw several currency exchange businesses at the Lagos airport that offered 380 naira to the dollar. Nigerian newspapers even include reports of the unofficial exchange rate.

The Buhari government hopes that the fixed exchange rate will prevent inflation. Yet, inflation has risen sharply to the highest rates in almost five years. The prices of many imported goods have almost doubled, suggesting that they reflect the black market exchange rate rather than the official rate.

I recently saw this problem firsthand when I visited one of the country’s largest manufacturers of cardboard box packaging. Its production lines were either slowed or shut down. Thousands of employees were seeing their hours, and wages, cut back. In some cases, the company had been unable to import materials like labels. In other cases, the company’s customers had run out of items to box.

This is how bad policy turns a currency crisis into a recession.

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by Walter Lamberson

Photo Credits: Getty Images

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Direttore Responsabile Giuseppe Frangi