If you track the performance of emerging market currencies that are floating particularly Egypt and Nigeria, then you’d know by now there seems to be a lot of benefit in floating a currency.
This Bloomberg article did just that. Egypt is recording increasing foreign investments. The Egyptian pound is also strengthening against the US Dollar and the parallel and official rates are narrowing.
However, not all is rosy, at least when it comes to inflation. As the chart below depicts
From about 9% in March 2016,Egyptian inflation has galloped to about 28%. Nigeria on the other hand has seen its inflation gallop from 9% to 18.72% according to the latest consumer price index released by the NBS.
Supporters of the CBN can look at this data and opine that their policies have at least contained inflation. But that’s if you’re being myopic. As far as I’m concerned, we are also headed in that direction and it’s only a matter of time before we hit the 20% region.
In fact, I predict Nigeria’s inflation will hit 20% by mid year. Most businesses are still yet to reflect price increases in their input. Those that have done so already are still likely to do more, especially with the potential increases in the price of fuel and diesel.
So long as Nigeria continues to import refined fuel, the risk of rising inflation remains a threat. Ironically, I believe strongly that a loosening of import could actually help Nigeria’s inflation rate. The logic is simple..loosen capital controls and restrictive imports and allow Nigerians import essential commodities at the cheapest possible prices. I’d explain this in a future article.
The fact however remains that floating the Naira is no silver bullet and does come with its own risk. It’s on the long run that it makes a difference. And has things stand, Egypt is poised to win that race.
Interesting Ugo.