Nigeria Hits Bottom Dollar – Literally

Crude oil

By Adrienne Klasa

Nigeria is faltering — and investors are voting on Africa’s largest economy with their pocketbooks.

Low oil prices, historically poor fiscal management, restrictive monetary policy and import bans have combined to reduce capital entering the country to a trickle, even as the population is growing and the government is looking to plug an $11bn fiscal deficit.

Recent data from Nigeria’s National Bureau of Statistics (NBS) show that capital inflows in the first quarter of this year fell to $710.97m — a drop of almost 90 percent from a peak in 2014 to the lowest level since reporting began in 2007.

First-quarter inflows fell by more than 54 percent from the last quarter of 2015 and by almost 74 percent year-on-year. Capital inflows include all foreign direct investment, portfolio investment and other investments into the country.

Manji Cheto, senior vice-president at Teneo Strategy, an advisory firm, says the numbers “confirm what has anecdotally been widely cited, that confidence in Nigeria’s economy has fallen — obviously triggered by the decline in oil prices, but clearly exacerbated by the government’s responses.”

Nigeria recorded its first trade deficit in at least seven years in the first quarter on a sharp fall in crude oil exports, which account for some 95 per cent of export earnings. A resurgence of attacks on pipeline infrastructure by militant groups in the restive southern Delta region is partly to blame.

Nigerian President Muhammadu Buhari addresses delegates at the start of a conference to tackle corruption at the Commonwealth Secretariat in London on May 11, 2016. / AFP PHOTO / LEON NEALLEON NEAL/AFP/Getty ImagesHowever, Nigeria’s restrictive monetary policy also plays a central role. While other major oil exporters have allowed their currencies to fall along with the price of oil, the naira has remained artificially pegged at 197 to the dollar since March 2015.

Muhammadu Buhari, president since May 2015, has until recently been unwavering in his refusal to allow the naira to devalue, or to lift import restrictions on a list of products ranging from spaghetti to carpets and paracetamol.

The policy’s aim was to kick-start domestic production in the import-dependent oil economy. However, coupled with foreign currency restrictions and a lack of manufacturing capacity, the import ban has instead led to shortages of basic products such as eggs and fuel. Manufacturing, the policy’s intended beneficiary, has been particularly hard hit.

Buhari, a former military ruler known for his closed-door approach to policy-making, said he would not allow a devaluation that would “kill the naira”.

However, fissures are emerging in that certainty.

Last week, governor of the central bank (CBN), admitted that a recession in Nigeria “now appears imminent” and said the bank would adopt a more “flexible” exchange rate policy. Black market rates have skyrocketed to around 350 naira to the dollar.

While the NBS sees the decline in oil prices as the main cause of falling capital inflows, it concedes that “investors may be concerned about whether or not they will be able to repatriate the earnings from their investments, given the current controls on the exchange rate”.

It also acknowledges that “growth has slowed in recent quarters [and] there may be concerns about the profitability of such investments”.

Combined with the governor’s comments, these statements hint that a change of course may be in the offing.

Buhari is right to fear a spike in inflation after any devaluation and to be cautious in this regard. However, the data clearly show that the situation is acute.

After struggling for months to get their hands on foreign currency, most investors and business owners would welcome a devaluation. However, the central bank has yet to give any specifics as to what a “flexible” policy would look like.

“If widely held assumptions that this means the introduction of a dual official exchange rate system are true, what the CBN will have to answer is how it will ensure that this does not just create another avenue for round-tripping and rent-seeking,” says Ms. Cheto at Teneo Strategy.

Nigeria’s outlook is not good. But at least the reality of the situation — long held at arm’s length — seems to be getting through to the upper echelons of government.

Hopefully they will make choices that restore investor confidence before the economy slides even further.

Adrienne Klasa is editor of This is Africa, an FT publication.