As the first recession in Nigeria in over two decades continues to bite, President Buhari’s government has increased the amount of foreign currency in the economy, last Friday selling more than $418 million. While this move was welcomed by business, it will likely only be effective in the short-term.
The economic crisis in Nigeria is mainly rooted in its lack of economic diversity and dependence on the sale of oil. The fall in oil prices – which represent more than two thirds of all government earnings – ran the country’s foreign currency reserves dry and has led to a significant devaluation of the naira.
In the face of this crisis, the policies adopted by the Nigerian authorities have been inconsistent. Last year, the Central Bank (CBN) announced that it was abandoning the pegged exchange rate and letting the naira float freely – freefall – with market forces. The government then enacted a “managed float” through the measured release of foreign currency, which is highly sought out by importers. Simultaneously, however, Buhari imposed restrictions on the import of more than six hundred goods. More recently, the government started increasing the amount of foreign currency in circulation having, since February, injected a total of $3.1 billion into the economy.
From a trading perspective, the current situation creates significant problems for retailers. Potential investors are scared due to the uncertainty and inconsistency of Buhari’s policies. A sudden decision to devalue the naira – especially with little foreign currency in circulation – would also devalue recent foreign investment. On the other hand, the “managed float” and lack of available foreign currency to answer demand still radically overvalues the naira, creating a yawning gap between unofficial and official dollar exchange rates. If you buy stock in dollars but sell in the market in naira then an overvalued dollar/naira rate is problematic for anyone trading currency at the official rate because nobody’s buying dollars at the official rate. In conjunction with import restrictions, traders face major obstacles.
In this context, the latest foreign currency injections by the government were welcomed, effectively reducing the difference between the exchange rates in the official and black markets and causing the naira to appreciate. But the effect has been short lived. The “measured floating” barely answers the need for foreign currency and does not succeed in reducing the gap between the official and black markets of currency.
The underlying issue of oil dependence and the need for greater economic diversity remain key in Nigeria. There are signs that Nigeria that the economy is recovering. Oil prices bottomed out in January 2016 and look set to rise steadily over the next few years, injecting much needed foreign currency into Nigeria. But according to some forecasts, oil prices will not return to the highs of 2012 for another decade. The quality of the federal government fiscal policy, the consistency with which it implements it and the credibility it has among investors will all shape the trading environment.
