Float Naira To Exit Recession, Experts Tell Nigeria

Again, economic experts have insisted that the Central Bank of Nigeria (CBN) must float the naira to deliver Nigeria from her current economic quagmire, noting that the current policy of the apex bank on foreign exchange lacks direction and does not boost confidence of investors. The experts, who gathered at a recent breakfast meeting organised by the Nigerian- America Chamber of Commerce in Lagos to discuss ‘Getting Nigeria out of recession: How the 2017 budget affects business outlook,’ said the apex bank created distortion in the economy through its multiple foreign exchange rates.

The experts, including Chief Economist at PWC, Andrew Nevin, Chief Executive Officer, Nigeria Stock Exchange, Oscar Onyema, Chief Executive Officer, Financial Derivatives Limited, Bismarck Rewane, Chairman, Nigeria Economic Summit Group, Bukar Kyari, National President, Nigerian American Chamber of Commerce, Olabintan Famutimi, said key changes were required, particularly on foreign exchange, misappropriation of fund as well as corruption otherwise the hope that the 2017 budget would have desired impact on the economy may remain elusive.

Kyari projected a situation where the naira would fall between the parallel market rate, standing at about N400 on the official rate rather than N305. The experts lamented that the current market structure created so much fear and uncertainty and may continue to cripple the economy if urgent solution is not provided.

Similarly, Reuter’s analysts say grappling with recession, widespread dollar shortages, a budget funding gap and international lenders’ reluctance to provide loans, Nigeria needs to follow the example of its emerging market peers like Egypt, Argentina and Russia and embrace floating exchange rates. “Such crises have occurred time and again in emerging markets, as countries are forced to ditch currency pegs, often after weeks or months of resistance that drains central bank coffers and sends the economy into a tailspin.

“But as Nigeria itself shows, currency reform cannot be half-hearted. Last June, the government devalued the naira by 30 per cent only to then return it to its straitjacket. Within days, dollar hoarding and currency black markets reappeared and a stock market rally quickly fizzled.

“The critical issue for Nigeria is a move to proper currency flexibility, not devaluation per se. The June 2016 devaluation demonstrates that,” said Hasnain Malik, head of frontier markets strategy at Exotix in Dubai. She added: “The majority of foreign institutional investors… cannot allocate new money to Nigeria if it is going to be trapped by capital controls.” Nigeria’s economic frailties were laid bare by the mid-2014 oil price collapse. Before that it had basked in the ‘Africa Rising’ hype gripping investors. In mid-2013, foreigners held $11.6 billion or a quarter of total Nigerian debt and some $10.3 billion in equities.

Much of that money fled after capital controls were imposed in 2015. By last October, daily equity trading volumes were a third of their 2013 levels, with foreigners’ share dwindling to half from 70 per cent, stock market data showed. It is feared that it will fall further if index provider MSCI fulfils its threat to drop Nigeria from its frontier equity benchmark.

The country has already lost its place in the GBI-EM emerging debt index, a benchmark for funds managing about $200 billion. Sunday Telegraph learnt that the Central Bank of Nigeria (CBN) may be considering achieving a market-determined exchange rate regime, according to an official economic plan released on Tuesday, as pressure mounts to let the naira float freely. The government will also review and possibly remove a ban on accessing foreign exchange for 41 goods and services, said the Economic Recovery and Growth Plan 2017-2020, released by the Budget Ministry.

Nigeria also sees 2017 inflation at 15.74 per cent, and at 12.42 per cent next year, the plan said. Inflation in January hit 18.7 per cent, its highest level in more than 11 years. Buhari administration was inaugurated soon after the collapse of global oil prices. But instead of accepting reality he reverted to policies he implemented when last in power in the 1980s, namely propping up the currency. This led to shortages of foreign exchange, squeezing imports. CBN released the naira from its peg of 197-199 to the dollar in June 2016, but panicked when it plunged, pinning it again at around 305.

Consequently, most of the foreign investors left the country, rather than wait interminably to repatriate profits.

The policy further thinned the source of forex to the economy, and by Monday, February 20, 2017, the naira had sunk to 520 on the black market leaving a wide gulf of 215 between the official rate and the black market. It has since recovered by around 13 per cent after the CBN released dollars and allowed posh Nigerians to buy them cheaply to pay for school fees abroad.

The naira traded as low as 375 per dollar on Monday, March 6 versus the official rate of 305, although that was still far stronger than black market levels around 450. It is feared at the government quarters that the inevitable inflationary spike could lead to unrest, particularly if they are forced to raise subsidised petrol prices.