Devaluation Delusions: Why Ethiopia and Nigeria Need More Than Currency Tricks

 

Nigeria and Ethiopia are navigating a stormy sea, but without a functional compass, their course corrections risk steering them into deeper waters. Indeed, for both countries, floating their currencies without broader reforms is akin to repainting a crumbling house while ignoring the cracks in the foundation.

In a world where currency devaluation is heralded as the magical elixir to all economic woes, one might be tempted to think that Ethiopia and Nigeria have finally cracked the code to prosperity by letting their currencies sink. But if economic reforms were a recipe, then simply allowing the birr and the naira to depreciate is akin to setting the oven temperature without actually mixing the ingredients. In other words, Ethiopia and Nigeria are halfway through the preparation, but the cake isn’t quite ready to rise.

The recent steps taken by Ethiopia and Nigeria to liberalize their currencies—Ethiopia floating the birr and Nigeria allowing the naira to depreciate—have been welcomed by international observers, especially the IMF. But anyone familiar with these two economies knows that currency liberalization alone is not the silver bullet. The story of these countries is much more complex, involving deep-rooted structural issues that won’t be solved by exchange rates alone.

Nigeria, Africa's most populous nation and its largest economy, has long struggled with a myriad of economic challenges. The naira has been allowed to depreciate significantly under President Bola Tinubu’s administration, a move that was necessary given the severe dollar shortages and mounting balance-of-payments crises. However, this is not the first time Nigeria has tried to tweak its currency. Past efforts have often resulted in short-term relief but failed to deliver long-term economic stability. This is because Nigeria’s problems run much deeper.

Take, for instance, Nigeria’s over-reliance on oil. The country derives about 90% of its foreign exchange earnings from oil exports. When global oil prices plummet, so does Nigeria’s economy. The structural weakness here is not just the over-reliance on oil but also the underdevelopment of other sectors. Manufacturing in Nigeria accounts for less than 10% of GDP, and productivity in this sector has been declining for years. Simply making the naira cheaper won’t suddenly make Nigerian manufacturers more competitive globally if they don’t have the capital, infrastructure, or skills to produce quality goods.

Moreover, public spending in Nigeria has been anything but efficient. Successive governments have indulged in wasteful expenditure, including on grandiose infrastructure projects that often fail to deliver value for money. President Tinubu’s administration has not yet made significant strides in curbing this trend. Instead, it risks falling into the same trap as its predecessors by continuing to fund expensive and sometimes unnecessary projects. This kind of spending, especially when financed by borrowing or printing more money, only exacerbates the fiscal deficit and drives inflation higher.

In Ethiopia, the story is eerily similar. Prime Minister Abiy Ahmed’s decision to float the birr came at a time when the country was down to its last $1.5 billion in foreign reserves—barely enough to cover two weeks of imports. The floating of the birr was meant to address the severe shortage of foreign currency and correct the balance of payments. However, Ethiopia’s economic challenges are not just about currency misalignment. The country’s economy has been hampered by the dominance of state-owned enterprises (SOEs) that consume vast amounts of resources while delivering minimal returns.

Ethiopia’s manufacturing sector contributes a paltry 4% to GDP, a figure that is embarrassingly low even by African standards. This is largely because private businesses in Ethiopia struggle to access capital, which is often tied up in inefficient SOEs. These enterprises, which are politically protected, receive favorable treatment from the government, making it difficult for private firms to compete. Floating the birr won’t change this dynamic unless accompanied by deeper structural reforms, including the privatization or better management of these SOEs.

Public spending in Ethiopia is another major issue. Prime Minister Abiy’s government has been generous with subsidies, especially on fuel, which has only widened the fiscal deficit. While these subsidies may be politically expedient, they are economically unsustainable. They encourage the continued consumption of expensive imports and do nothing to address the underlying imbalances in the economy. Ethiopia’s involvement in the devastating war in Tigray has further strained the public finances, diverting resources that could have been used for more productive investments.

Both Nigeria and Ethiopia are at a crossroads. The currency reforms are a step in the right direction, but they are just the beginning. Without broader economic reforms, including tackling corruption, reducing wasteful public spending, and supporting the private sector, these countries will continue to struggle. The danger is that they might end up like Egypt or Pakistan, perpetually cycling in and out of IMF programs without ever achieving true economic stability.

The lesson for Ethiopia and Nigeria is clear: currency liberalization, while necessary, is not sufficient. It’s like setting the stage for a play but forgetting to write the script. The audience—ordinary citizens—will be left confused and disappointed if the promised prosperity never materializes. Leaders in both countries must press on with more comprehensive reforms if they hope to build sustainable economies.

In the end, one might wonder if Ethiopia and Nigeria are simply rearranging deck chairs on the Titanic, hoping that changing the currency rate will keep the ship afloat. But without fixing the holes in the hull—like wasteful spending and inefficient state enterprises—the ship is destined to sink. It’s time for the captains of these economies to chart a new course, one that goes beyond currency tinkering and addresses the fundamental flaws holding back their nations. Otherwise, they may find themselves in a never-ending cycle of crisis and reform, with little to show for it.