From Venezuelan crisis to free float: Nigeria’s naira choices

Oil prices around $30 a barrel. An unprecedented government spending plan. And black-market rates near records.

The pressure on Nigeria’s central bank Governor Godwin Emefiele to scrap the country’s almost one-year-old limits on naira trading and allow the currency to depreciate has become so intense that even the Senate wanted answers at a hearing Jan. 19 in the capital, Abuja.

With monetary authorities due to decide on interest rates on Tuesday, some analysts say this is as good time as any for Africa’s biggest oil producer to abandon what has amounted to a currency peg of 197-199 naira to the dollar since March.

“They have to do something,” said Ayodele Salami, who manages about $500 million of African equities as chief investment officer of London-based Duet Asset Management Ltd. Foreign investors are seeking a depreciation to about 250, and an end to foreign-exchange trading restrictions before re- entering the country, he said. “It would really undermine the credibility of the central bank if they say nothing about it.”

The foreign-exchange controls are hurting U.S. companies’ ability to do business in Nigeria and are seen as a “barrier to trade,” Commerce Secretary Penny Pritzker said in an interview in the commercial capital, Lagos, on Monday.

Here are the options open to Emefiele, and their probable consequences:

* Devalue and let the currency trade in a band: Analysts at Credit Suisse Group AG and Morgan Stanley are among 13 of 16 surveyed by Bloomberg who predict the central bank will devalue the naira on Tuesday to between 214 to 275 per dollar.

In this scenario, Emefiele would still want some control, and can do so by allowing the naira to trade 5 percent either side of a new midpoint, said Chernay Johnson, an analyst at Credit Suisse in Johannesburg.

* No devaluation for six months: Despite the growing scarcity of dollars and the black-market rate plunging to 305 this month, the central bank, whose policies are backed by President Muhammadu Buhari, has no plans to devalue for at least another six months, according to JF Ruhashyankiko, a Goldman Sachs Group Inc. economist in London. In the meantime, Emefiele will curb the supply of dollars to banks to save foreign reserves at their lowest level since at least mid-2010, he said.

* Let the naira float: Buhari and Emefiele have said that weakening the currency may accelerate inflation already at a three-year high of 9.6 percent. That makes this option unlikely, especially given Nigeria’s history of retaining a strong grip on the currency, according to John Ashbourne, a London-based economist at Capital Economics Ltd.

* Create a second official exchange rate: Emefiele may continue holding the central bank’s official rate and allow companies deemed strategic, such as fuel importers, access to it, said Razia Khan, head ofAfrica economic research at Standard Chartered Plc in London. The regulator may then let everyone else use a more liberalized interbank market in a bid to encourage foreign-exchange inflows.

The danger is that it could distort the market and lead companies and individuals able to buy at official rates to sell back their dollars on the interbank and black markets to profit from what would be wide spreads, she said.

“There has been increasing talk of the possibility of a two-tier exchange rate,” said Khan. “Nigeria had one in the past. All it did was encourage round-tripping. You cannot police it.”

* Resort to a Venezuela-style regime: Emefiele could try to maintain the current regime indefinitely, which may lead to the black market being the only source of dollars for most Nigerians and “risks pushing the country into a Venezuela-type crisis,” according to Ashbourne of Capital Economics.

The South American oil exporter, where the official rate of 6.3 bolivars per dollar is almost irrelevant against a black- market rate that’s as high as 850, declared an economic emergency this month.

“For Nigeria, it would mean such a complicated system that would inevitably create corruption and waste,” he said. “In an economy where so much is imported, it would be incredibly painful.”

 – Bloomberg