Cheap oil should beget cheap cur­rency, but Nige­ria’s pres­i­dent isn’t budg­ing

▶ The cen­tral bank is starv­ing busi­ness of badly needed dol­lars ▶ “Peo­ple were ex­pect­ing the Buhari div­i­dend”

Bloomberg Businessweek (North America) - - News - �Chris Kay and Paul Wal­lace, with Yinka Ibukun Edited by Christo­pher Power

Since his elec­tion as Nige­ria’s pres­i­dent in May, Muham­madu Buhari, a 73-year-old for­mer gen­eral, has made some progress on two cam­paign prom­ises: to at­tack cor­rup­tion, es­pe­cially at state com­pa­nies, and to wage a vig­or­ous of­fen­sive against Boko Haram, the Is­lamic ter­ror­ist group that oc­cu­pied a cor­ner of north­east Nige­ria.

He has not fared as well with his pledge to im­prove the econ­omy. Nige­ria, Africa’s largest oil pro­ducer, is suf­fer­ing from the plunge in crude prices. The govern­ment, which in 2014 re­lied on oil for two-thirds of its rev­enue, now can’t pay many teach­ers or fi­nance in­fra­struc­ture projects. Nige­ria’s oil ex­ports in the first three quar­ters of 2015 were 32 per­cent lower than the same pe­riod the year be­fore. With the econ­omy grow­ing at barely half 2014’s rate of 6.3 per­cent, a re­ces­sion can’t be ruled out this year, ac­cord­ing to Mor­gan Stan­ley. Nige­rian stocks have fallen 15 per­cent since Dec. 21, the most in sub-sa­ha­ran Africa.

“The an­ticor­rup­tion and se­cu­rity drives are pos­i­tive, but they need to be matched with clear, un­am­bigu­ous eco­nomic poli­cies,” says Ronak Gopal­das, an an­a­lyst in Jo­han­nes­burg for Rand Mer­chant Bank. “At $30 a bar­rel, there’s no get­ting away from the fact it’s go­ing to be re­ally tough.”

Buhari’s re­fusal to per­mit a de­val­u­a­tion is com­pound­ing the prob­lem. The Nige­rian cen­tral bank has been peg­ging the naira at 197 to 199 per dol­lar for al­most a year, even as oil pro­duc­ers Canada, Mex­ico, and Rus­sia have let their cur­ren­cies slide. In Nige­ria, dol­lars are in short sup­ply be­cause oil sales are down, and be­cause the cen­tral bank has been buy­ing naira to keep the cur­rency strong. Last year, the na­tion spent about $5 bil­lion in for­eign ex­change re­serves de­fend­ing the naira. “Nige­ria’s cur­rency has come un­der in­creas­ing pres­sure,” John Ash­bourne, an Africa an­a­lyst at Cap­i­tal Eco­nom­ics, wrote in a re­port on Feb. 16. “A de­val­u­a­tion of the of­fi­cial ex­change rate is in­evitable.”

The cen­tral bank says a weaker cur­rency would only ac­cel­er­ate in­fla­tion, al­ready at a three-year high of 9.6 per­cent. Higher prices would hurt the lower and middle classes that de­pend on im­ports, which in­clude gaso­line: The an­ti­quated state-run re­finer­ies can’t make enough.

Kola Karim, head of oil and gas pro­ducer Shore­line Group, de­cided last year to is­sue a $500 mil­lion euro bond to ex­pand drilling op­er­a­tions. Then crude prices fell below $50 a bar­rel in July, and Shore­line sus­pended the sale. Karim planned to rely on in­come from his con­struc­tion and pow­er­gen­er­a­tion busi­nesses— ex­cept that the lack of for­eign cur­rency in­flows starved com­pa­nies of dol­lars to pay for needed sup­plies from over­seas, crimp­ing their op­er­a­tions. Shore­line will have to cut 35 per­cent of its al­most 2,000 work­ers. “It’s a dou­ble whammy,” Karim says in his La­gos of­fice. “Get­ting dol­lars to bring in raw ma­te­ri­als is very tough. If Nige­ria was earn­ing enough from its oil rev­enue, we wouldn’t have that.”

Dan­gote Group, Nige­ria’s largest com­pany, just called the for­eign ex­change sit­u­a­tion “ex­tremely tight” and said it’s re­ly­ing on in­come from its in­ter­na­tional ce­ment op­er­a­tions and on ex­port- credit agen­cies to get around the short­age of dol­lars. Se­cu­rity com­pany Pil­grims Africa, whose clients in Nige­ria in­clude Gen­eral Elec­tric, is shed­ding about one-third of its 400 full-time em­ploy­ees as oil com­pa­nies can­cel projects and fewer for­eign com­pa­nies bring in staff.

Buhari has said crit­ics will have to “work much harder” to con­vince him or­di­nary Nige­ri­ans will gain any­thing from a de­val­u­a­tion. “There is no per­fect pol­icy,” says Kay­ode Fayemi, min­is­ter of solid min­er­als de­vel­op­ment. He adds, “We have an in­de­pen­dent cen­tral bank, and the cen­tral bank should do its job to con­vince the stake­hold­ers” if a change in pol­icy is needed.

The black mar­ket rate for the naira has reached a record 350 per dol­lar, 76 per­cent weaker than the of­fi­cial rate. In Oc­to­ber for­mer cen­tral bank Gov­er­nor Muham­madu Sanusi told busi­ness lead­ers that Buhari and God­win Eme­fiele, the cen­tral bank chief, were “in de­nial” over the cur­rency. Sanusi was dis­missed as cen­tral bank gov­er­nor in 2014 by for­mer Pres­i­dent Good­luck Jonathan af­ter ac­cus­ing Nige­rian Na­tional Pe­tro­leum of with­hold­ing bil­lions of dol­lars from the govern­ment.

“Peo­ple were ex­pect­ing the Buhari div­i­dend, and that never re­ally ma­te­ri­al­ized be­cause of the pol­icy in­er­tia,” says Rand Mer­chant Bank’s Gopal­das. “There’s still the per­cep­tion that the cur­rency has to be de­val­ued. But you’re get­ting this stub­born re­sis­tance at the top.”

The bot­tom line Nige­ria, Africa’s big­gest oil pro­ducer, is suf­fer­ing from lower prices—and its un­will­ing­ness to de­value the naira.

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