Pound getting pounded: What can Nigeria learn from the UK?
Pound is getting pounded

It has been a hell of a week for the United Kingdom. 

Barely four days after the Queen’s funeral, the government—itself only two weeks old—announced the most significant tax reductions in 50 years. What happened next took most people by surprise.

Key takeaways:

  1. In the medium run, the UK’s new policies will cause annual borrowing in 2026 to stand at £114 billion, compared with the £32 billion that was previously forecasted.

  2. Markets have responded to the new policies by selling the pound and pushing the cost of UK government borrowing up, treating the UK economy like an emerging market. 

  3. The UK’s story highlights how markets respond to irresponsible fiscal policies. A path Nigeria’s current government has been going down.

In the aftermath of the UK’s “mini-budget” (which was not mini at all), the British pound dropped as much as 7%. At one point, it reached its lowest level ($1.03) against the dollar since 1971. I say “dropped”, but other news outlets described this event as either a “plunge” or a “crash.” For context, £1 was equivalent to $1.35 at the start of the year. And for historical context, I once exchanged £1 for over $2 back in 2007 when I was in secondary school. Not only does this make me feel old, but this is also the kind of drop that you will expect from an Emefiele-controlled currency.

While a Nigerian like me is used to a 7% drop in the naira, it is not something that usually happens in a developed country like the UK. Ironically, advanced countries with flexible exchange rates don’t experience large currency moves as much as countries with “fixed” exchange rates.

Even more dramatic was the response in the UK’s bond market. Investors refused to take the news without punishing the government, which announced that it would finance its extra spending with more debt. The interest rate at which the government can borrow money soared. Barely a few hours after the announcement, the interest on a 10-year UK government bond increased from 3.5% to 3.7%, making it the UK bond market’s worst day in 20 years. As the Financial Times (FT) put it, Kwasi Kwarteng's (the UK’s new chancellor born to Ghanaian parents) budget “broke” the bond market.

Already, the UK is being described as an “emerging market” in the media. 

The important question is why. Why did the UK announce these measures, which have spooked markets? But more importantly, why are the markets so aggressively against the recently announced policies? In

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Tokunbo Afikuyomi, Jr.

Tokunbo Afikuyomi, Jr.

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