After several decades, Nigeria has finally abandoned its currency peg to the US dollar. Hampered by low global oil prices, the African economy has lost some lustre. But will a devaluation be enough to turn its fortunes around?
The Central Bank of Nigeria’s decision to allow the naira to float freely has been welcomed by investors, given that a multiple-rate regime reminiscent of Venezuela was being mooted by central bank governor Godwin Emefiele not so long ago.
A cheaper currency will boost Nigeria’s attractiveness in the eyes of foreign investors – but liberalisation has been a long time coming, and efforts to resist it have been deleterious for the country’s economy.
Like other oil-dependent economies, Nigeria has suffered badly since prices started to fall in late 2014. But while Saudi Arabia has blown through its vast foreign exchange reserves, Nigeria’s central bank has tried to resist, instead restricting the ability of importers to buy foreign currency, unless they bring in essential goods.
Since August 2015, importers of a host of items, including steel pipes, tomatoes, wheelbarrows and toothpicks have turned to the black market to procure US dollars, paying upwards of 370 naira per dollar to keep trading.
Worse still, Nigeria is reliant on imports for even the most basic goods. It is now in recession, and despite the central bank’s efforts, inflation has risen to more than 15 per cent.
The naira is now expected to fall to a more competitive 300/$, but Nigeria’s prosperity faces a host of other obstacles, including endemic corruption, militancy, ethnic and religious divisions, and widespread unemployment.
Elected on an anti-corruption platform in May last year, President Muhammadu Buhari has agreed with David Cameron’s candid assessment that Nigeria is “fantastically corrupt”.
Rent-seeking is rife. The country’s massive public administration remains closely tied to the oil and natural gas industries, and depends on them for more than 70 per cent of its revenues.
A World Bank review estimates that $400bn (£278.5bn) of oil revenues have been stolen or misappropriated since Nigeria became independent in 1960.
Buhari’s anti-graft drive appears to be having some success. Earlier this month, the information ministry said that it is in the process of recovering over $10bn in stolen funds and assets. But concerns remain that Buhari is relying heavily on using this money to plug the gap in the country’s budget deficit, which has climbed to two per cent of GDP, and that the clampdown concentrated chiefly on the opposition party, with little scrutiny of Buhari’s own All Progressive Congress.
Even if foreign investors are tempted by a currency determined more by the market, they might be irked by Nigeria’s ranking on the World Bank’s ease of doing business index, where it comes 169 out of 189 countries.
With no call from Opec to cut production, Saudi Arabia and other oil economies are exporting as much of the black stuff as possible. Nigeria’s oil exports, meanwhile, have fallen to a 20-year low.
This is partly because of a resurgence in militant activity in the oil-rich Niger Delta. Buhari has ripped up agreements between the previous government and local militants, who were being paid to protect the very oil pipelines they once tried to destroy.
There are now fears that this violence could spread to nearby Biafra, intensifying support for the creation of a state independent from Nigeria.
Despite this, Nigeria’s economy still shows great promise.
In 2014, it overtook South Africa as the continent’s largest economy. And while oil dominates its exports, there has been a concerted effort to diversify in recent years.
With the right reforms, McKinsey reckons that the largest sector – agriculture – could more than double by 2030 to $263bn. Services now make up half of output, and a growing consumer class spells opportunity for overseas investors.
“Until now, investment activity and growth have been severely constrained by the lack of foreign exchange,” says Razia Khan, chief Africa economist at Standard Chartered. “A more flexible exchange rate regime – especially one that allows for a gradual lessening of the foreign exchange shortage over time – should allow Nigeria’s economy to recover.”
However, the naira’s devaluation won’t be a silver bullet. “Nigeria simply does not have infrastructure in place,” says Khan.
“But currency flexibility will unlock investment in manufacturing in the fast-moving consumer goods sector, which has been waiting on the sidelines for some time. Power sector investment will also receive a boost.”
Nigeria may be down, but it’s not out.