Commodities, Currencies, Frontier Markets

IMF Urges Nigeria To Devalue Currency As Its Economy Crumbles

Nigeria FXThe IMF is urging Nigeria’s Central Bank to devalue its local currency, the naira, and to remove curbs on access to foreign exchange as part of a package of aggressive economic policies in order to counter the impact of low oil prices, according to a statement released on Wednesday.

Nigeria, Africa’s largest economy and largest crude producer, an OPEC member state, has been reeling alongside fellow oil producing nations as the price of oil has plunged.

Indeed, the oil industry is in crisis as Brent crude, the global oil benchmark, has tumbled from an average of almost $100 a barrel in 2014 to about $30 this year, a plunge of 70 percent amid a global supply glut alongside a slowdown in global growth which is battering economies, markets, and companies.

Nigeria’s economy relies heavily on oil, and prior to the collapse in oil prices, oil accounted for 70 percent of the government’s revenue and 95 percent of the its export revenue, Stratfor Global Intelligence estimates.

The impact can be seen as the IMF estimates that Nigeria’s growth slowed to 2.8 percent in 2015, which would be the slowest pace since at least 1999That is compared to 6.3 percent growth in 2014.

Coupled with fuel shortages in the first half of the year and lower investor confidence, growth is estimated to have slowed to 2.8 percent in 2015 (from 6.3 percent in 2014), weakening corporate balance sheets, lowering the resilience of the banking system, and likely reversing progress in reducing unemployment and poverty.

Amid the oil crisis, Nigeria has seen its revenue slashed and its currency and stocks plunge. According to Capital Economics, the naira has lost 32 percent of its value against the U.S. dollar since the start of the year. The currency has also been driven to record lows in the black market due to dollar shortages.

Nigerian equities entered a bear market in January as the Nigerian Stock Exchange All Share Index fell more than 21 percent since its previous peak on Dec. 31. The index was also the worst performer among 93 global indexes tracked by Bloomberg this year.

Nigeria bear market - Bloomberg

Chart courtesy of Bloomberg

The U.S. traded Nigeria ETF, The Global X MSCI Nigeria ETF (NGE), has plunged nearly 50 percent since April 2015 and is already down nearly 20 percent so far this year.

NGE

The Global X MSCI Nigeria ETF (NGE). Chart courtesy of stockcharts.com

To limit price swings, the Nigerian Stock Exchange (NSE) introduced a circuit breaker on Jan. 15 as the index saw its worst start to the year since at least 1999.

With the new breaker system in place, trading on the NSE will be stopped if the index moves 5 percent from the last close, and if the circuit breaker triggers for a second time then trading will be suspended for the remainder of the day.

With troubling times on the domestic front, some Nigerian firms are looking abroad, such as FCMB Group, a Nigerian lender, who plans to expand in at least two African countries as the plunge in oil prices has reduced opportunities and income for banks operating in the nation.

Repeated calls have been made for Nigeria to devalue its currency, however its Central Bank Governor and President have resisted such notions.

As such, foreign investment inflows tumbled by 32 percent in 2015, the Nigerian Stock Exchange said in a report on it’s website on Dec. 19, as currency controls have knocked investor confidence.

Furthermore, as investors have bailed from Nigeriathe nation’s stock market has seen its market capitalization halve in dollar terms since the end of 2013 to $41.9 billion, which is barely a 10th of Singapore’s level and half Colombia’s, according to Bloomberg.

Africa's Dollar Based Stock Market Capitalization - Bloomberg

Chart courtesy of Bloomberg

Nigeria’s exports tumbled about 40 percent in 2015, thus pushing the current account deficit to an estimated 2.4 percent of GDP, the IMF said.

The nation is also facing an unprecedented record budget deficit to pay for government salaries and build infrastructure.

Nigeria’s general government deficit doubled to about 3.3 percent of GDP in 2015, due to its dependence on oil revenues, the IMF said.

Nigeria’s falling economic growth has also likely reversed progress in reducing unemployment and poverty, the IMF cautioned.

As Bloomberg describes, Nigeria’s economy is in crisis and is flirting with disaster.

As the Nigerian Central Bank has continuously ruled out a devaluation, it chose rather to test less conventional and unpopular measures in an attempt to curb the slide in its currency and try to prop up its economy.

In April 2015, the Central Bank limited the amount that Nigerians could spend on debit cards abroad.

Nigeria’s unpopular capital controls were tightened in June 2015 as the Central Bank blocked access to foreign currency for the importation of 41 items including rice, soap, toothpicks, and cement. It also restricted access to the interbank currency market for the purchase of foreign currency bonds.

Liquidity in Nigeria’s interbank market then dried up after a directive in September last year for government departments to move their funds from commercial banks into a “Treasury Single Account” (TSA) at the Central Bank, part of a policy implemented by new President Muhammadu Buhari’s drive to fight corruption.

Following the move, there was panic, and overnight interbank lending rates spiked to 200 percent which thus paralyzed the interbank naira market as banks were unwilling to lend to each other, even when rates fell back to 20-30 percent several days later.

Nigerian Central Bank Governor Godwin Emefiele responded and told the market, simply, “don’t panic

In November 2015, the Central Bank restricted U.S. dollar sales and purchased naira in an effort to stoke demand, however defending the naira’s peg versus the dollar proved too costly as the bank burned through foreign exchange reserves, to the tune of $28.4 million per week, as reserves fell to around $28 billion in January compared to $37 billion in June 2014.

In an unprecedented move in December 2015 the Central Bank outright banned the use of debit and credit cards by its citizens travelling abroad.

In January, Nigeria’s Central Bank banned its foreign-exchange bureaus from buying U.S. dollars through commercial banks, in a move to clamp down on naira speculation and prevent people from rushing to procure dollars as the naira declined.

Nigeria’s 2,500 licensed foreign-exchange dealers were then limited to only buy dollars at its own auctions.

Such restrictions on access to foreign currency have suffocated Nigerian businesses dependent on imports and have resulted in a forex crunch in addition to encouraging capital flight.

Pressure has mounted on Nigeria’s Central Bank Governor Godwin Emefiele to scrap the country’s limits on naira trading and to allow the currency to depreciate. The issue has become so intense that even the Senate wanted answers at a hearing on January 19 in the capital, Abuja.

Fellow oil producing nation, Venezuela, who also relies heavily on oil, as well has felt the immense pressure from the oil price crisis and recently raised fuel prices by 6,000 percent and devalued their currency by 37 percent.

So will Nigeria succumb to the strain and devalue their currency?

The IMF warned that Nigeria’s restrictions have significantly impacted the private sector whom depend on an adequate supply of foreign currencies.

Foreign exchange restrictions introduced by the Central Bank of Nigeria (CBN) to protect reserves have impacted significantly segments of the private sector that depend on an adequate supply of foreign currencies.

But there could be hope for Nigeria down the road, with urgent action and decisive measures.

The IMF said Nigeria’s economy could improve slightly to 3.2 percent in 2016 and may rebound to 4.9 percent in 2017 should the government take immediate action to cut spending and better manage the naira as well as enable priority infrastructure investments.

As part of a credible package of policies, the exchange rate should be allowed to reflect market forces more and restrictions on access to foreign exchange removed.

Nigeria also needs to boost non-oil revenue and broaden its tax base, while structural reforms, such as passing a revamped Petroleum Industry Bill, are needed to strengthen its oil sector, the IMF said.

Steadfast implementation of structural reforms is key. Adopting a sound Petroleum Industry Bill, including by applying the Anti-Money Laundering/Combating the Financing of Terrorism framework, will help strengthen the regulatory framework for the oil sector. Emphasis should be sustained on doing “more with less” to improve the efficiency of public sector service delivery and create an enabling environment to attract investment.

With oil prices are expected to “remain low for a long time”, continuing risk aversion by international investors, and downside risks in the global economy, Nigeria’s outlook remains challenging, the IMF said.

The IMF warned that key risks to Nigeria’s outlook moving forward are lower-than-budgeted oil prices, shortfalls in non-oil revenues, a further deterioration in finances of state and local Governments, and a resurgence in security concerns.

Discussion

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