Nigeria’s economy is growing at the slowest pace this decade as oil prices drop. Companies are complaining they can’t get the dollars they need to do business. And trading in the naira has long since dried up.
There are many good reasons why Godwin Emefiele, who runs the central bank of Africa’s biggest economy, should lift currency controls and let the naira depreciate. One of the things holding him back is politics, NewsNow reported.
Devaluing the naira may give opposition parties the opportunity to claim that Emefiele’s main supporter, President Muhammadu Buhari, has lost control of the economy. With his backing, the policy chief will be able to resist his critics into 2016 before the worsening economic slump eventually forces him to capitulate, according to Standard Chartered and Bank of America.
“They could probably hold out for at least six months, maybe even a year,” said Ayodele Salami, chief investment officer for London-based Duet Asset Management, which manages about $200 million of African equities. “The central bank has chosen currency stability and the price they’re paying for that is growth. They could hold the line for a lot longer than the markets expect.”
Africa’s top oil producer introduced curbs on buying foreign-exchange from late 2014 in a bid to prop up the naira as prices for crude, the source of two-thirds of government revenue and 90% of export earnings, plummeted. These measures have all but fixed the exchange rate at 198-199 per dollar since March, even as other oil exporters from Russia to Colombia and Malaysia have let their currencies slide.
Barclays and HSBC Holdings still think the central bank will be forced to weaken the naira to between 220 and 230 before the end of 2015.
The International Monetary Fund says the currency measures are detrimental to Nigeria, where growth slowed to 2.35% on an annualized basis in the second quarter. Former central bank governor Muhammadu Sanusi II said last week his successor was “in denial” if he thought he could continue propping up the naira.
Former general Buhari, who took office as president in May, acted to stabilize the naira when he ruled Nigeria in the 1980s, and since coming to power this time around has said devaluation wouldn’t be “healthy.” The government put out a statement late on Thursday reiterating its opposition to debasing the naira. Emefiele has also warned a devaluation would stoke inflation.
