The foreign-exchange drought may ease slightly (and very temporarily) if some hoarders of dollars decide to cash in their stash in the wake of the decision to float the naira, but any substantive and lasting improvement will take time to materialize and still depends on a number of actions the government will need to take. For now, hard-currency reserves will remain in desperately short supply and the economy remains headed for its first recession in a decade.
For quite a while, Central Bank Governor Godwin Emefiele, fully backed in this endeavor by President Muhammadu Buhari, had been trying to hold the naira at close to 198 per U.S. dollar, notwithstanding the fierce downward pressures on the unit that came with the global collapse of oil prices. The black market soon was quoting 360:1 or worse, and tight capital controls imposed by the government produced increasingly painful shortages of goods across the board, from raw materials and spare parts to medicines. Official hopes that the problem could be remedied or at least eased with loans from abroad predictably proved idle, as investors have not been exactly eager to put money into a currency headed for a big devaluation, a move that just about every outside analyst had been viewing as inevitable for some time.
Failed Bunker Mentality
In recent weeks, the walls started to close in on Buhari’s administration. Plummeting oil receipts meant that the central government was operating on only about one-fourth the USD 5 billion in monthly revenues it had before the price fall began in mid-2014. Many state governments found themselves unable to pay wages. Power generation was at its lowest in years. Industry was crippled by the severe restrictions on imports at the very time a major effort should have been made to diversify the economy away from oil. United Airlines and Spain’s Iberia had both suspended flights to Nigeria, complaining that up to USD 1 billion of their earnings were trapped there.
The effort to uphold the naira’s official value has cost the Central Bank nearly half the USD 43 billion in hard-currency reserves it had held only two years ago. Nonetheless, inflation in May spiked to nearly 16% annually, and the economy, which had shown an average yearly growth rate of as much as 7% in the decade to 2014, wound up with a decline of 0.36% in the first quarter of 2016. More than half a million workers are said to have lost their jobs in this year’s first four months. People employed in the informal sector have been finding it far more difficult to eke out a living. The official policies are clearly not working, and this has come to be understood in official circles.
CB Governor Godwin Emefiele has now let it be known that with effect from June 20 the naira is to trade at a market-determined rate, in other words, is to float without any CB effort to fix its exchange rate. In its initial reaction, the unit is likely to drop to black-market levels and, conceivably, even overshoot those. This may prompt dollar hoarders to sell off part or all of their stash. Exporters, banks and private individuals had all been holding on to hard currency when they were supposed to use the unrealistic official exchange rate. The result could be at least a temporary easing of the dollar shortage, if at the devalued rate.
Worried about inflation, though, the Central Bank is not likely to stay totally out of the market. In fact, Mr. Emefiele has said his institution will continue to intervene to defend the naira’s value “as the need arises” and that the CB “will not allow the system to be undermined by speculators and rent-seekers.” The CB may even feel it has to raise interest rates to stave off hyperinflation. And therein lies a problem because the Bank will continue to be short of hard currency. While officials are putting at USD 10 billion—the “mind-boggling” amount said to have been pillaged from public coffers during the previous administration of President Goodluck Jonathan, only about USD 600 million of this has so far been returned to Nigeria with, reportedly, another USD 330 million waiting in foreign jurisdictions to be cleared for remittance. This will not go far in bridging the yawning fiscal deficit, which is estimated at USD 11 billion for 2016.
Adjustment Will Take Time
World market prices for oil have rebounded a bit, but the outlook remains uncertain, and there is next to no likelihood that they will rise back up to past levels anytime soon. Nigerian production, meanwhile, has been suffering from company cut-backs and pipeline attacks, with total output now running at about 1.45 million barrels a day, far below the 2.2 million assumed in the current year’s budget. While the government has been paying rebels in the vast Niger Delta (where almost all of the country’s oil lies) to abstain from sabotage and has hired thousands of militants to protect the pipelines and facilities they used to tap and bomb, there is now a new group of saboteurs at work, calling itself the Niger Delta Avengers, which has been destroying installations and equipment to protest what its members perceive to be an unfair distribution of oil money. Official say these rebels have taken about a million barrels a day out of production. So severe has their impact been that the government felt compelled to shift some of the armed forces fighting the ISIS-affiliated Boko Haram terrorists in the North to the Delta.
Given all this, any easing of the dollar shortage will not last long. Local banks estimate that there is an unmet backlog of dollar demand of USD 5-6 billion. And while the authorities will try hard to improve the situation by tapping the international debt markets, Nigerian bonds will be a tough sell so long as the prospects for the government’s intentions, the economy and oil remain opaque.