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”

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.