The recent appreciation of the US Dollar against Nigerias Currency, Naira is resembling the

incidents of past emerging market currency crises, from Mexicos 1994 Tequila Crisis to
Thailands 1997 shock that threw all of Southeast Asia into recession. Despite recently
depreciating currencies and increasing debt burdens in emerging markets, the specter of these so-
called first generation currency crises is no longer relevant for the majority of countries, most of
whom abandoned exchange rate pegs years ago. The exception is Nigeria, which is reverting to
disastrous economic policies popular during the time of its current presidents last stint in power,
in the 1980s. By choosing a strong peg, the president and the country have seemingly learned none
of the important lessons of the first generation currency crises.

President Muhammadu Buhari took office in July 2015 in an election that was heralded as a victory
for peaceful democratic transition. He focused his campaign on security issues and eliminating
corruption but waited over five months to appoint a finance minister. Buhari continues to support
the currency controls and the exchange rate peg even in the face of slow growth and a drop in
international investment, calling any potential devaluation unhealthy. Unfortunately, Buharis
adamant assertion that the Naira remain overvalued is reminiscent of his economic policies when
he served as the countrys dictator. He was previously in power from 1983 to 1985, before
Nigerias economy started to grow rapidly and before investors took interest in the country. (Budd,
2016)

1) Drop in Oil Price: Crude sales account for up to 70% of government revenue and more than
90% of the country's export earnings. Oil is also the source of most of the country's foreign
exchange reserves. The global crash in oil prices and ongoing rebel attacks on oil infrastructure in
the southern swamplands hammered the countrys economy badly. (Giokos, 2017)

2) Shortage of Foreign Currency Reserve: Before the crash in oil prices, Nigeria had nearly $43
billion in reserves. By June 2016, efforts by the central bank to support the naira had pushed the
figure below $27 billion. Unfortunately, as both oil production and oil prices have dropped, the
exchange rate band came under pressure. Despite calls by the IMF and other international
institutions to abandon the peg, the Central Bank has continued to support it, selling on average
$100 million in reserves per day in the beginning of 2015 to maintain the peg. Nigeria has almost
six months worth of imports in reserves available, but they are quickly disappearing. Concerned
with the rapid decline of currency reserves, the government banned the purchase of foreign
exchange by importers. These restrictions, as well as the removal of the countrys bonds from
JPMorgans Government Bond Index (GBI-EM) in September, have led to capital flight. The
country already experienced a low growth rate of only 2.35% in June 2015, the lowest in over ten
years.

3) Pegging the Currency: The foreign exchange shortages were first caused by lower oil prices,
but policymakers ultimately made the situation worse by pegging the Nigerian naira at a rate which
analysts said was overvalued. As such, markets were not clearing and there were shortages of FX.
The fixed currency rate had created a vast black market for US dollars and squeezed the country's
economy. The naira was fixed at 197 to the US dollar, but the black market rate had soared to 370.
The currency fix was introduced in February 2015 to stop the naira from falling when lower oil
prices sparked trouble for Nigeria's economy. But a prolonged period of holding a currency at an
artificial level often has a disruptive effect as foreign companies become reluctant to import goods
when they are paid at distorted levels. (Patience, 2016) In perfect economic conditions, with high
oil prices and high investor confidence, the peg was a force of stability. Unfortunately, in today's
macroeconomic climate, defending it caused Nigeria's downfall and prove to the world that they
have not learned from the painful experiences of other emerging market countries.

Bibliography
Budd, K. (2016, February 29). Nigeria's Impending Currency Crisis. Retrieved from Sais Perspective:
http://www.saisperspectives.com/2016issue/2016/2/29/nigerias-impending-currency-crisis

Giokos, E. (2017, May 02). Nigeria's cash problem: Multiple exchange rates, wild swings and dollar
shortages. Retrieved from CNN Money: http://money.cnn.com/2017/05/02/investing/nigeria-
naira-currency-dollars/index.html

Patience, M. (2016, June 15). Nigeria allows naira to float against US dollar. Retrieved from BBC News:
http://www.bbc.com/news/business-36538379