Sinking or Swimming in an Era of Currency Floating: The Case of Ethiopia and Nigeria

ABSTRACT Macroeconomic stabilization is a core objective for every nation. As developing countries strive to mitigate vulnerability from global shocks, Nigeria and Ethiopia have recently adopted exchange rate floatation to achieve trade balance, fiscal sustainability, price stability, and economic growth. Despite floating exchange rates in these countries, prices continue to rise, economic growth is positive, yet sluggish, social unrest is increasing, and their fiscal deficit remains significant. Considering these issues, the study examined whether Nigeria and Ethiopia are thriving or struggling in the era of currency floatation. A descriptive ex post facto research design was employed. We sampled data from prefloatation, during‐floatation, and postfloatation periods for comparison purposes. The results revealed a mixed outcome of exchange rate floatation in Ethiopia and Nigeria. In both countries, there has been an increase in the economic growth rate, the share of services in GDP, the exchange rate, the current account ratio to GDP, and nonoil exports. Conversely, currency floatation has led to a decrease in the share of the industrial and manufacturing sectors in GDP in both economies. Furthermore, it was established that for Ethiopia, currency floatation resulted in a decline in the contribution of agriculture to GDP, food inflation, credit to the government, money supply growth, the debt‐to‐GDP ratio, and the tax revenue‐to‐GDP ratio, while headline inflation remained stable. For Nigeria, floatation increased the contribution of agriculture to GDP, food inflation, headline inflation, credit to the government, money supply growth, and the tax revenue to GDP ratio. Moreover, following currency floatation, external reserves, foreign direct investment, and foreign private investment have declined in Nigeria. The study concluded that currency floatation in an undiversified economy creates vulnerability to global shocks, which stifles real sector growth due to round‐tripping in the foreign exchange market and elevated debt burden. We recommend optimal policy choices to prevent these economies from sinking with the floatation of their exchange rate amidst the intention to close the premium. It is recommended that fiscal consolidation, coordination and public assets optimization through the equity market are crucial to harnessing the benefits of the current foreign exchange rate in the short term. However, strengthening fiscal institutions, investing in industrially relevant human capital, improving energy supply, and technology are essential in the long run to unlock the potential of these economies for sustained productivity growth across sectors for inclusive economic transformation.