President Muhammadu Buhari is repeating an economic error he made as dictator 30 years ago

“GIVE me lucky generals,” Napoleon is supposed
to have said, preferring them to talented ones.
Muhammadu Buhari, a former general, has not
had much luck when it comes to the oil price.
Between 1983 and 1985 he was Nigeria’s
military ruler. Just before he took over, oil
prices began a lengthy collapse; the country’s
export earnings fell by more than half. The
economy went into a deep recession and Mr
Buhari, unable to cope, was overthrown in a
coup.
Now he is president again. (He won a fair
election last year against a woeful opponent;
The Economist endorsed him.) And once again,
oil prices have slumped, from $64 a barrel on
the day he was sworn in to $32 eight months
later. Growth probably fell by half in 2015, from
6.3% to little more than 3% (see article). Oil
accounts for 70% of the government’s revenues
and 95% of export earnings. The government
deficit will widen this year to about 3.5% of
GDP. The currency, the naira, is under pressure.
The central bank insists on an exchange rate of
197-199 naira to the dollar. On the black
market, dollars sell for 300 naira or more.
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Instead of letting the naira depreciate to reflect
the country’s loss of purchasing power, Mr
Buhari’s government is trying to keep it aloft.
The central bank has restricted the supply of
dollars and banned the import of a long list of
goods, from shovels and rice to toothpicks. It
hopes that this will maintain reserves and
stimulate domestic production.
When the currency is devalued, all imports
become more expensive. But under Mr Buhari’s
system the restrictions on imports are by
government fiat. Factory bosses complain they
cannot import raw materials such as chemicals
and fret that, if this continues, they may have to
shut down. Many have turned to the black
market to obtain dollars, and are doubtless
smuggling in some of the goods that have been
banned.
Nigerians have heard this tune before. Indeed,
Mr Buhari tried something similar the last time
he was president. Then, as now, he resisted
what he called the “bitter pill” of devaluation.
When, as a result, foreign currency ran short, he
rationed it and slashed imports by more than
half. When Nigerians turned to the black market
he sealed the country’s borders. When
unemployment surged he expelled 700,000
migrants.
Barking orders at markets did not work then,
and it will not work now. Mr Buhari is right that
devaluation will lead to inflation—as it has in
other commodity exporters. But Nigeria’s policy
of limiting imports and creating scarcity will be
even more inflationary. A weaker currency would
spur domestic production more than import
bans can and, in the long run, hurt consumers
less. The country needs foreign capital to
finance its deficits but, under today’s policies, it
will struggle to get any. Foreign investors
assume that any Nigerian asset they buy in
naira now will cost less later, after the currency
has devalued. So they wait.
Those who fail to learn from history...
Mr Buhari’s tenure has in some ways been
impressive. He has restored a semblance of
security to swathes of northern Nigeria that
were overrun by schoolgirl-abducting jihadists.
He has won some early battles against
corruption. Some of his economic policies are
sound, too. He has indicated that he will stop
subsidising fuel and selling it at below-market
prices. This is brave, since the subsidies are
popular, even though they have been a disaster
(the cheap fuel was often sold abroad and
petrol stations frequently ran dry). If Mr Buhari
can find the courage to let fuel cost what the
market says it should, why not the currency,
too? You can forgive the general for being
unlucky; but not for failing to learn from past
mistakes.
Source- The economist.