Nigeria, Africa’s largest economy is becoming less attractive to investors who are wary of the country’s economic future at a time the country’s currency is overvalued. According to a member of the central bank’s Monetary Policy Committee, having a fixed exchange rate when there is a plan to increase government borrowing just doesn’t work.
Dr Adedoyin Salami, a faculty member of the Lagos Business School said the naira was 10 percent over-valued. The naira trades at more than 35 percent below the official rate on the black market versus the dollar.
The academic, who is one of the 12 people that make up the MPC, made his position known at the January meeting of the committee and voted to move the exchange rate band to plus or minus five percent from 220, minutes from the meeting showed. However, his proposal gained no support, with the central bank stressing its focus was on exchange rate stability, irrespective of how it impacts inflation.
Salami pointed out: “The absence of an exchange rate management policy has diminished Nigeria’s attractiveness as a destination for international capital flows”.
David Faulkner, an economist at HSBC Holdings Plc in Johannesburg agrees with Salami. In a note to clients, Faulkner admits that where there are some scope for faster growth this year, much will depend on Nigeria’s exchange rate policy. He noted that the current foreign exchange and import restrictions are having a detrimental effect on growth and economic activity.
Nigeria’s growth slowed to 2.8 percent last year, the weakest level since the country returned to democracy in 1999 and down from the 6.2 percent growth recorded in 2014. That was not all, industrial output which expanded to 6.8 percent in 2014, contracted 2.2 percent in 2015.
The country is facing its worst economic crisis in years due to the slump in global oil prices, the country’s major revenue source and top foreign exchange earner. This prompted the central bank to peg the currency and also introduce restrictions to conserve foreign exchange reserves which have fallen to its lowest levels for more than a decade.
The International Monetary Fund (IMF) had in Februrary urged Nigeria’s central bank to allow the local currency to devalue as part of ways to reverse the impact of low oil prices on the country. But President Muhammadu Buhari had insisted that Nigeria will not devalue the naira, backing the central bank’s policy.
Nigeria plans to borrow up to $5 billion to fund its 2016 budget deficit. Although the MPC meeting minutes showed that members of the committee were all against increased spending at a period of low revenues from oil. This, they advised would curb inflation, but the government is expected to go ahead with its borrowing plans.
Ratings agency Moody’s had put Nigeria’s Ba3 credit rating under review for downgrade. While the agency admits that the Nigerian government is undertaking a range of plans that could mitigate the impact of the current economic climate on its credit standing, including tax reform to broaden the non-oil tax base, Moody’s noted that the rating review was important to allow it to assess the credibility and sustainability of those plans and the government’s ability to mitigate the negative impact of the lower oil price on its credit standing.
“Moody’s would downgrade Nigeria’s Ba3 rating if the review were to conclude that the government’s plans are unlikely to be adequate to sustain Nigeria’s economic or government balance sheet strength,” the agency said in a recent statement. In case of a downgrade, Moody’s said, with the look of things, it would not be more than one notch.
It added that signs of acute fiscal or balance-of-payments deterioration would also exert downward pressure on the rating.
“However, in the case of Nigeria, those risks are rather limited as the government’s total debt is estimated at 13.6% of GDP in 2015 and compares very favourably with peers. Similarly, external debt for the country is small and likely to increase while remaining at around 6% of GDP over the next few years.”
While Moody’s statement offer some hope, growth in the first quarter of 2016 may be worse than the previous quarter because nothing has really been done differently from last quarter. Nigeria’s growth may be lower than 2.8 percent in the first quarter of 2016.