Nigeria's central bank may soon give bond and stock investors what they have
been pleading for: a weaker naira.
Governor Godwin Emefiele announced after a meeting of the Monetary Policy
Committee in Abuja, the capital, on Tuesday that a more flexible
foreign-exchange
system would be unveiled "in the coming days." But he gave scant detail and left
plenty of questions. Here are some answers:
What's the problem?
Nigeria has held the naira at 197-199 per dollar since March 2015, even as other
oil exporters from Russia to Colombia and Malaysia let their
currencies drop amid
the slump in crude prices since mid-2014. Foreign reserves dwindled as
the central
bank defended the peg, while foreign investors, fearing a devaluation,
sold Nigerian
stocks and bonds.
While President Muhammadu Buhari and Emefiele argued a devaluation would fuel
inflation, that happened anyway: consumer prices accelerated at the
fastest pace in
six years in April as the black-market naira rate plummeted. To make matters
worse, data released four days before the MPC meeting showed the economy
contracted in the first quarter for the first time since 2004 as the
dollar shortage
curtailed manufacturing. That probably surprised policy makers, prompting the
change of heart, according to Mathias Althoff, a fund manager at Tundra Fonder
AB, which has about $200 million invested in frontier market stocks, including
Nigerian banks.
What happens next?
While Emefiele didn't specify what he meant by "greater flexibility,"
analysts at
Renaissance Capital Ltd. believe the central bank will allocate
dollars at a fixed
rate to strategic industries — like energy and agriculture — while
letting the naira
weaken in the interbank market, where everyone else would buy their foreign
currency. The central bank may also try try to control the new interbank rate by
imposing a trading band of about 5 or 10 percent around it, according
to Althoff.
Will that satisfy investors and save the economy?
If the central bank doesn't allow the naira to drop enough, foreign
investors will
continue to shun Nigerian assets, according to Althoff. The currency
should trade
at around 285-290 per dollar, according to Alan Cameron, an economist at Exotix
Partners LLP. A devaluation won't solve Nigeria's structural economic problems —
which include an over-reliance on oil exports — and may fuel inflation
in the short
term. But it would make Nigerian exports more competitive, curb imports and
encourage foreign investment.
What are the pitfalls?
Most investors would prefer a fully-floating naira, yet doubt that
Nigeria, which has
always had currency controls of some sort, will take that option. And there are
concerns it will be impossible for the central bank to ensure that
only importers
meeting its criteria will be able to buy foreign-exchange at the
discounted official
rate. Many analysts fear that in a nation U.K. Prime Minister David Cameron
described as "fantastically corrupt," access to the official rate will
come down to
political connections.
"The suggestion of a dual exchange rate, with the maintenance of the official
window, is a concern," Razia Khan, head of African research at
Standard Chartered
Plc, said. "This might lead to continued distortions in the market,
ultimately with
pressure on foreign-exchange reserves."
What else should investors watch out for?
Buhari. He has made it clear that he, not Emefiele, is the person in charge of
exchange-rate policy. The president is loath to allow the currency to
drop unless
he's forced to and in February likened such a move to "murder." He has yet to
make any response to the MPC's announcement. And while he is due to make a
speech on May 29, the first anniversary of his coming to power, local
press reports
suggest he will focus on the government's fight against corruption and Boko
Haram's Islamist insurgency.
The central bank has hinted at change before, only to do nothing. "The MPC has
dangled the carrot of exchange rate reform, but without giving any
details of what
a reformed market would look like," Cameron at Exotix said. "To the skeptics
among us, this will simply sound like a re-hash of the same old material we've
been hearing about since December 2015."
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