Losing battle to stop naira’s rot

Pressure to ditch the rules

NIGERIAN central bank governor Godwin Emefiele is losing the battle to prevent the naira from going the way of other oildependent currencies.

After imposing trading restrictions in February to prevent dollars from fleeing the economy, importers have been unable to pay suppliers, a thriving black market has sprung up in foreign banknotes and teachers have gone unpaid.

The naira has been stable over the past six months since the central bank introduced regulations to halt a 20 percent decline in the currency in the 12 months to February 12 to a record low of 206.32 per dollar.

That is heaping pressure on the authorities to ditch the rules and let the naira weaken alongside Russia’s rouble, Colombia’s peso and Norway’s krone. Forwards prices suggest the currency of Africa’s biggest oil producer would tumble 15 percent within six months and 25 percent over the next year.

“Their currency is still very overvalued and so they’re going to remain under pressure to allow it to depreciate,” said Gareth Brickman, an analyst at Stamford, Connecticut-based ETM Analytics.

The central bank has fought depreciation “tooth and nail, every step of the way,” he said.

Emefiele, 54, has said the exchange rate is “appropriate” and argues that allowing it to weaken would stoke inflation in a country that imports almost all its manufactured goods.

The strong currency and a scarcity of dollars are hurting growth, which the International Monetary Fund estimates will be 4.8 percent this year, less than half the average over the past decade.

Traders are speculating Emefiele will have to change tack and abandon efforts to crack down on speculators.

He bolstered the rules after a strategy of burning through foreign reserves failed to stop the naira sliding to a record 206.32 per dollar on February 12.

ETM’s Brickman predicts the central bank will be forced to devalue the currency by about 10 percent by year-end to 220 per dollar, from 199.05 at the market close in Lagos on Monday.

Currency trading has “dropped dramatically” under the new rules, said Craig Thompson, a broker at Nyon, Switzerland-based Continental Capital Markets.

The trading curbs, together with the more than 50 percent drop in oil prices since mid2014, are weighing heavily on Nigeria. Banks are increasingly wary of lending to individuals and Nigeria’s main stock index has dropped 16 percent since the start of April.

Decline

Ibrahim Mu’azu, a spokesman for Nigeria’s central bank, defended its currency policy and said authorities would meet companies’ legitimate demand for foreign exchange. Scrapping the rules is all but inevitable to many traders.

Standard Chartered, which gets more than half its revenue from emerging markets, predicts a decline to 222 naira to the dollar by year-end, while Goldman Sachs sees it falling to about 230.

Emefiele, a former chief executive of Zenith Bank – Nigeria’s second-biggest lender by market value – is not the only African policy maker trying to protect his currency against the drop in oil.

Angola’s kwanza, which has slumped 23 percent in the past year, has been little changed this month as the nation props up the exchange rate by spending reserves. – Bloomberg