Nigeria needs to take a cue from Argentina on currency controls
Barely a week after he was sworn in as president of Argentina, Mauricio Macri has taken a bold step to help boost the country’s economic growth. Macri announced, in Buenos Aires on Wednesday, that he would lift currency controls that have made the Argentine peso artificially strong by allowing the currency float freely. However, economists have also said that while this move might boost export and increase economic growth, it may also fuel inflation in the country, which already stands at 25 percent.
“We said that we were going to lift currency controls when the conditions were right and today the conditions are right,” Argentina’s Finance Minister, Alfonso Prat-Gay, said at a press conference in the country’s capital. He also added that he expects the peso to plunge nearly 30 percent, from the current official exchange rate of 10 pesos to the dollar.
While the newly elected president of Argentina has taken this step, Nigeria is still putting stringent policy measures that could affect the country adversely, if done without caution. The country’s currency has the potential to become worse than the Zimbabwean dollar which, as of June, stood at 35 quadrillion Zimbabwean dollars to $1.
Since Nigeria’s Central Bank (CBN) Governor, Godwin Emefiele assumed office on 26th March 2014 amidst a climate of falling oil prices, several policies have been put in place to maintain the value of the naira against the US dollar. These measures include a tightening of monetary policies and exchange rate controls, imposing a ban on foreign exchange for 41 different imports and limiting daily withdrawals by Nigerians with domiciliary accounts. Emefiele’s policies to sustain the naira are similar to the policies that were used in Argentina during the previous administration.
However, these policies by the previous administration of Argentina neither saved the country’s currency from falling nor reduced the inflation rate. Since the country has been going through a tough time, economically, the newly elected president decided to relax policy controls on currency by doing the following and also relying on investor confidence:
Devaluation of the Peso
According to media reports, the peso is expected to drop from 9.8 per dollar to the black-market rate of between 14 and 15 per dollar. This is likely to spark the country’s biggest currency depreciation since the economic meltdown in 2002. It would also give the farmers incentives to sell their crops at a higher price. In Nigeria, economic experts and bank CEOs have called for the devaluation of the naira on several occasions, yet, the government has adamantly refused to listen.
“Currency controls managed to kill the supply of dollars and didn’t stop demand,” Prat-Gay said. “Ending the currency controls is the starting point for getting the economy back on its feet.”
Although currency devaluation could affect the country’s foreign reserve, Argentina has made provisions for more funds. The country would be getting fresh loans between $15 billion and $25 billion from a combination of agreements with international banks, grain exporters and China’s central bank. The Argentinian Central Bank is also expected to reach a deal with foreign banks within 10 days for a credit line worth more than $5bn. Last week, a banking source told Reuters that Argentina was in talks over a loan with HSBC, JPMorgan Chase & Co, Goldman Sachs, Deutsche Bank and Citigroup Inc.
Lifting restrictions on imports
Farmers in Argentina, a grains-exporting powerhouse, has been waiting for the peso to weaken before selling stockpiles of soybeans. Manufacturers have also argued for controls to be lifted to allow them import crucial parts for production. The country also sealed a deal with grains exporters to liquidate $400m of produce per day over the next few weeks.
This year, the Central Bank of Nigeria placed import restrictions on 41 goods and services in order to encourage local production of these items. This ban is seen as ridiculous, because the country does not have the capacity to produce most of these goods at the moment. The importation of these goods and services could help reduce their prices in the market, which could also in turn lead to a fall in the inflation rate.
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