Earlier this month, my trip to Nigeria for meetings unveiled a striking aspect of its economic landscape: the parallel currency market. Even after the supposed end of the dollar peg in June, the Nigerian naira persists in being traded at varying values across different channels.
The official exchange rate dictates 315 naira for one US dollar. However, during my visit, I learned that the unofficial, or “black market,” exchange rate was significantly higher, hovering around 465 naira per dollar. This wasn’t a minor discrepancy; the gap between the official and black market rates approached a staggering 50%.
Initially skeptical of such a substantial difference, I decided to experience it firsthand and exchanged US$50 for Nigerian money. I chose a tourist-frequented area within the Eko Hotel on Victoria Island, known for its numerous souvenir stalls. Upon inquiring with a vendor about currency exchange, he readily connected me with his boss. With a wide smile, the boss inquired, “US Dollars?”
He proposed an exchange rate of 450 naira per dollar. I countered, suggesting a rate closer to 500. We eventually agreed on 470 naira. Handing over US$50, I received 23,500 naira – nearly 8,000 more naira than I would have obtained at a bank using the official exchange rate for Nigeria Money.
The Naira’s Two Faces: Official vs. Black Market Rates
This experience highlights the stark reality of Nigeria’s dual exchange rate system, a situation where the value of Nigeria money diverges dramatically depending on where you exchange it. While tourists might find a silver lining in the black market’s favorable rates, the implications for the broader Nigerian economy are far-reaching and complex.
Beyond mere intellectual curiosity for foreign observers, these distortions in the foreign exchange market are significantly impacting Nigerian importers. They struggle to acquire the necessary US dollars to purchase goods from abroad, hindering trade and supply chains. Furthermore, investors are hesitant to invest in assets denominated in a currency perceived as overvalued at official rates and susceptible to devaluation.
Why the Divide? Factors Fueling Nigeria’s Currency Conundrum
This disparity between official and unofficial Nigeria money exchange rates is not arbitrary. It stems from a confluence of factors, including government policies and underlying economic realities. Nigeria’s dependence on oil revenues for government income and foreign exchange earnings makes it vulnerable to global oil price fluctuations, events largely beyond its control.
However, the significant spread between the official and black market rates is primarily a consequence of the conflict between government-mandated exchange rate policies and market-driven pricing. My personal experience changing money in Lagos underscored a critical point: the forces of supply and demand, not policy dictates, are dictating the true value of Nigeria money in the parallel market. Unsurprisingly, as the gap between market and official prices widened, the volume of foreign exchange traded at the official rate plummeted by a staggering 90%.
The International Monetary Fund expects the Nigerian economy to shrink 1.7% this year.
Economic Fallout: How Nigeria’s Money Situation Impacts the Nation
The consequences of this Nigeria money situation are deeply felt across the Nigerian economy. One of the most immediate impacts is on inflation, which has been steadily climbing. Fueled in part by the scarcity of foreign exchange and the higher cost of imports obtained through the black market, inflation is now running at approximately 18%. Compounding these woes, the International Monetary Fund (IMF) projects a 1.7% contraction for the Nigerian economy this year. This combination of high inflation and economic contraction paints a bleak picture for Nigeria’s financial health.
Nigerian President Muhammadu Buhari is no stranger to the complexities of managing the naira. During his leadership in the 1980s, he famously resisted devaluing the currency as part of an IMF restructuring program, a stance that preceded his removal from office in a coup. Now, democratically elected, he faces a similar dilemma.
Lessons from Argentina: A Potential Path Forward for Nigeria Money?
Nigeria’s economic challenges necessitate significant reforms. For decades, the “Washington Consensus” framework, emphasizing market liberalization, privatization, and austerity, held sway in economic policy circles. However, the global financial crisis eroded confidence in this approach.
Interestingly, in June, IMF economists published a paper titled “Neoliberalism: Oversold?” questioning the universal applicability of austerity and capital account liberalization, suggesting that their costs could outweigh benefits. They argued for context-specific reforms, rejecting a one-size-fits-all approach.
Nigeria appears to be navigating a nuanced path. Instead of austerity, Buhari’s administration has increased infrastructure spending to stimulate the economy. Simultaneously, the government has attempted to control the currency market rather than fully embracing a free float for the naira. Yet, there are also signals of market liberalization, with plans to sell state assets, including presidential jets and energy holdings, and efforts to attract foreign investment through public-private partnerships in infrastructure.
Nigeria’s “Local Remedy”: A Unique Approach or More of the Same?
Perhaps Nigeria’s approach is best summarized by its finance minister who, at an IMF/World Bank meeting, declared, “we have our own local remedy” for the nation’s economic challenges. This suggests a departure from conventional prescriptions and an attempt to tailor solutions to Nigeria’s specific context.
“We have our own local remedy”—Nigerian finance minister
However, within Nigeria’s business community, the prevailing sentiment leans towards market-oriented liberalization, infrastructure investment, and reduced bureaucracy. Aliko Dangote, Africa’s wealthiest individual, advocates for selling state assets and seeking loans to raise over $15 billion needed for economic revitalization. Bola Onadele, CEO of Nigeria’s securities exchange FMDQ, believes a complete float of the naira is essential.
My Lagos money exchange experience drew parallels to Argentina in late 2015. Argentina grappled with a similar situation where a wide gap existed between the official and “blue market” exchange rates. This unsustainable disparity prompted Argentina, following a shift towards more market-oriented policies, to remove capital controls in December 2015. Under President Mauricio Macri, Argentina embraced business-friendly reforms, attracting substantial foreign investment and witnessing an economic turnaround. The IMF now projects Argentina’s economy to grow by 2.8% in 2017, and its Merval index has surged over 30% in dollar terms since the devaluation.
Like Argentina, Nigeria may need to endure the short-term pain of fully floating its currency to achieve long-term economic recovery. While this could trigger further inflation, potentially even hyperinflation, historical precedents, such as the Asian Financial Crisis, demonstrate that countries undergoing significant devaluations can emerge stronger with robust growth in the years following.
Ultimately, policymakers must carefully weigh short-term pain against long-term gain, recognizing that drastic measures can create instability with lasting consequences. The crucial takeaway is that context matters profoundly. Generic, cookie-cutter solutions are unlikely to succeed in the intricate landscape of Nigeria money and its economic future.
Vikram Mansharamani is the President of Kelan Advisors, LLC and the author of Boombustology: Spotting Financial Bubbles Before They Burst(Wiley, 2011). To learn more about him or to subscribe to his free mailing list, visit his website. He can also be followed on Twitter @mansharamani or by liking his Facebook page.
