L
LequteMan
Guest
Nigeria is in a tough place. According to an article in the Economist over 90% of its foreign exchange income is derived from oil. The collapse in the oil prices has resulted in a dramatic in foreign exchange earnings and depleting foreign exchange reserves. Nigeria has asked the World Bank and African Development Bank for $3.5bn in emergency loans. Observers worry about the country’s ability to boost revenues and to take the necessary measures to diversify the economy. The government itself derives between 50% and 70% of its revenues from oil.
Christine Lagarde of the IMF recently called on Nigeria to show more flexibility on the Nigerian naira exchange rate, along with calls from within Nigeria and from foreign investors for Nigeria to devalue its currency, (the Naira). So far the Central Bank of Nigeria has resisted.
Instead the Central Bank has introduced measures banning the import of certain items using officially sourced foreign currency and limited the amount of foreign currency that can be withdrawn on naira-denominated bank cards. There are also limits on how much foreign currency Nigerians can spend online.
These measures have not been popular amongst Nigerians who have been unable to pay for to pay for hotels or shopping and businesses that have had to wait weeks for foreign currency to purchase raw materials or capital equipment.
One estimate is that the central bank has only been able to meet one tenth of the demand for foreign exchange. “Black market rates have risen to 35% above the official exchange rate.
The government and Central bank position is correct. The calls to devalue the currency are based on; a sharp fall in GDP, as without access to foreign exchange businesses are finding it difficult to operate and foreign investors worried about the risk of devaluation.
Those in favour of devaluation argue that local companies will have to shut down due to an inability to purchase import raw materials. This would slow economic growth. They also argue that a weaker currency would spur domestic production more than import bans will. The counter argument is that if the devaluation were to reflect the “black market rate” the subsequent 50% increase in raw material prices could have a similar effect.
The argument that foreign investors are holding off in fear of a depreciating naira, is self-fulfilling. The longer investors hold back, the greater the pressure on the naira. There may be other reasons too. Low commodity prices, a slowdown in global trade and the decision of the US Federal Reserve’s to raise interest rates last month may be factors in investment being delayed or funds being transferred to safer investments.
Classic exchange rate theory is based on the supply and demand for the foreign currency. With the propensity of the Nigerian elite for excessive consumption; Nigeria was one of the fastest growing markets for private jets (locally known as PJ’s) and German carmaker Porsche is one of a number of luxury brands that have offices there; the import restrictions are sensible. The current policy is also consistent with President Buhari’s mandate to curb corruption, which has been responsible for significant foreign exchange outflows.
Nigerian GDP per capita is just over $3,200 with huge disparity within its distribution. Allowing the naira to depreciate would likely result in a sharp jump in the cost of household items and energy. The wealthy will be less impacted by devaluation; many have access to foreign exchange through association with the oil sector or foreign businesses. The sudden price increases on top of the damage to the economy from weak oil prices would hit the less well-off hardest and possibly lead to social unrest.
The government should stay on the current path of a selective supply of foreign exchange for the greater good of the nation. The government must prioritise its foreign exchange needs and clamp down severely on arbitrageurs between the official rate and black market rates. The current economic situation is an opportunity for Nigeria to get serious about diversification and to create an enabling environment for the talented diaspora to return.
Nigeria’s problems stem from poor historical governance, corruption, inefficiency and the failure to diversify. One certainty is that a Nigerian devaluation will NOT result in a higher global oil price. Another is the risk of inflation. The elite who purchase foreign goods online or holiday abroad may complain but they too must share the pain. The government must adopt an exchange rate policy for the benefit of all its 170 million citizens.
first published on Suracii
Christine Lagarde of the IMF recently called on Nigeria to show more flexibility on the Nigerian naira exchange rate, along with calls from within Nigeria and from foreign investors for Nigeria to devalue its currency, (the Naira). So far the Central Bank of Nigeria has resisted.
Instead the Central Bank has introduced measures banning the import of certain items using officially sourced foreign currency and limited the amount of foreign currency that can be withdrawn on naira-denominated bank cards. There are also limits on how much foreign currency Nigerians can spend online.
These measures have not been popular amongst Nigerians who have been unable to pay for to pay for hotels or shopping and businesses that have had to wait weeks for foreign currency to purchase raw materials or capital equipment.
One estimate is that the central bank has only been able to meet one tenth of the demand for foreign exchange. “Black market rates have risen to 35% above the official exchange rate.
The government and Central bank position is correct. The calls to devalue the currency are based on; a sharp fall in GDP, as without access to foreign exchange businesses are finding it difficult to operate and foreign investors worried about the risk of devaluation.
Those in favour of devaluation argue that local companies will have to shut down due to an inability to purchase import raw materials. This would slow economic growth. They also argue that a weaker currency would spur domestic production more than import bans will. The counter argument is that if the devaluation were to reflect the “black market rate” the subsequent 50% increase in raw material prices could have a similar effect.
The argument that foreign investors are holding off in fear of a depreciating naira, is self-fulfilling. The longer investors hold back, the greater the pressure on the naira. There may be other reasons too. Low commodity prices, a slowdown in global trade and the decision of the US Federal Reserve’s to raise interest rates last month may be factors in investment being delayed or funds being transferred to safer investments.
Classic exchange rate theory is based on the supply and demand for the foreign currency. With the propensity of the Nigerian elite for excessive consumption; Nigeria was one of the fastest growing markets for private jets (locally known as PJ’s) and German carmaker Porsche is one of a number of luxury brands that have offices there; the import restrictions are sensible. The current policy is also consistent with President Buhari’s mandate to curb corruption, which has been responsible for significant foreign exchange outflows.
Nigerian GDP per capita is just over $3,200 with huge disparity within its distribution. Allowing the naira to depreciate would likely result in a sharp jump in the cost of household items and energy. The wealthy will be less impacted by devaluation; many have access to foreign exchange through association with the oil sector or foreign businesses. The sudden price increases on top of the damage to the economy from weak oil prices would hit the less well-off hardest and possibly lead to social unrest.
The government should stay on the current path of a selective supply of foreign exchange for the greater good of the nation. The government must prioritise its foreign exchange needs and clamp down severely on arbitrageurs between the official rate and black market rates. The current economic situation is an opportunity for Nigeria to get serious about diversification and to create an enabling environment for the talented diaspora to return.
Nigeria’s problems stem from poor historical governance, corruption, inefficiency and the failure to diversify. One certainty is that a Nigerian devaluation will NOT result in a higher global oil price. Another is the risk of inflation. The elite who purchase foreign goods online or holiday abroad may complain but they too must share the pain. The government must adopt an exchange rate policy for the benefit of all its 170 million citizens.
first published on Suracii
