Measures introduced by the Central Bank of Nigeria (CBN) aimed at preserving foreign exchange reserves amidst lower oil prices have produced a mixed response both at home and abroad.
Crude is a major player in Nigeria’s economy, accounting for two-thirds of government revenue and more than 90% of export earnings. The fall in prices has increased downward pressure on the naira over the last year, culminating in a 20% decline in the currency’s value against the dollar between July 2014 and February 2015.
Despite growing pressure to allow the naira to depreciate further, the CBN’s governor, Godwin Emefiele, has maintained a tight monetary policy, introducing currency controls in a bid to curb demand for foreign exchange.
While the value of the naira has remained within a small band, between N198:$1 and N199:$1 since it was last devalued in February, both local and international investors have advocated for further movement.
“The underlying logic of holding the exchange rate has been completely picked apart in the last five or so months,” Alan Cameron, an economist at London-based equity research firm Exotix Partners, told media in September.
The diverging sentiment has led to a widening disparity with the country’s parallel market, where the naira was trading at an average more than N215:$1 in August before reaching N232:$1 in early November.
Whereas other major oil producers, including Russia, Colombia and Kazakhstan, have allowed their currencies to weaken, the CBN has remained resolute in its stance to maintain the current peg, in part due to concerns over inflation, which already stands at more than 9%.
To stem the outflow of foreign reserves, the CBN introduced a series of capital controls in June, including a ban on using foreign exchange to import more than 40 items, ranging from rice and rubber to glass. The CBN has also dipped into foreign exchange reserves, which fell to $30.3bn in late October, down 22.4% year-on-year, according to data from the CBN.
While the CBN had hoped the capital controls would also help stimulate the domestic supply chain, the measures have prompted concerns from the private sector, particularly from firms that rely on imports.
Local manufacturers say the ban prevents them from accessing key imported raw materials. According to Frank Jacobs, president of the Manufacturers’ Association of Nigeria, the sector has posted negative growth since the start of the year, with economists predicting that third-quarter figures will signal further declines.
The controls, which have restricted liquidity in Nigeria’s market, are also beginning to negatively impact bond trading.
The resulting lack of liquidity led JPMorgan to remove Nigeria from its local currency emerging markets bond indexes (EMBI), which are tracked by more than $200bn worth of funds. While Nigeria will still be included in JPMorgan’s hard currency EMBI, which is expected to limit the impact of the downgrade, the country will not be eligible for re-entry to the local currency EMBI for at least 12 months.
In a note to industry press in early September, Gareth Brickman, market analyst at US-based ETM Analytics, estimated that more than $3bn worth of Nigerian bonds may need to be sold as a result of the downgrade.
In spite of the impact the current monetary policy has had on the economy, the CBN, which is independent, has received public backing from President Muhammadu Buhari’s administration, with some caveats.
In his first public comments on the subject, Buhari backed the CBN’s foreign exchange policies, saying he opposes further depreciation.
Kemi Adeosun, the new minister of finance, also voiced support for the CBN’s decision to limit foreign exchange trading. “What the CBN governor has done is brought in some breathing space, because if we allowed the market to continue, all our reserves would have been depleted,” she told lawmakers in mid-October.
That being said, the government has indicated it would be willing to consider amending aspects of the current policy.
Yemi Osinbajo, Nigeria’s vice-president, has signalled that exceptions to some of the capital controls were up for discussion. “We are going to have negotiations with the operators of the manufacturing sector to seek ways on how foreign exchange control can be eased to enable the items that are not eligible for foreign exchange to be covered,” he said in early October.
For now, investors will continue to keep a close eye on Nigeria’s foreign exchange markets and signals from public officials, monitoring whether mounting pressure will produce a shift in the CBN’s toolkit.
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