Bloomberg reports Nigerian economy is facing disaster
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Bloomberg reports Nigerian economy is facing disaster

- Global media company Bloomberg reports that the Nigerian economy is facing disaster.

- Refusal to devalue the naira criticised amid the global slump in oil prices.

- Nigerian equity said to be one of the worst performing figures in the world.

The crisis faced by the Nigerian economy just got a lot worse.

Central bank Governor Godwin Emefiele on Tuesday resisted repeated calls to weaken the naira despite a plunge in oil prices that has slashed revenue in Africa’s biggest crude producer.

He stuck to his foreign-exchange restrictions that have led to capital flight, curbed output in the continent’s largest economy and led to the naira dropping to a record low on the black market.

READ ALSO:  PDP attacks Lai Mohammed over 2016 budget

Emefiele gave no indication in his monetary policy committee statement that he is ready to ease controls even though they have been widely panned by investors, criticized by businesses and questioned by lawmakers.

That is set to deepen the crisis for an economy that grew at its slowest pace in 16 years in 2015, is facing inflation of 10% and a record budget deficit to pay government salaries and build roads and power plants.

Bloomberg reports Nigerian economy is facing disaster

“There is pressure but there is no way of exerting market discipline on the Nigerian central bank,” Ayodele Salami, the chief investment officer at Duet Asset Management in London.

“We need to see a collapse in growth.  It is not yet gone into territory where they have to panic. If growth was to be 1% or even go negative, I think that would definitely be the key thing that would persuade the central bank to move.”

Imports restricts and devaluation

The economy probably expanded 3% last year, the slowest pace since 1999, and is set to grow 4.1% in 2016, according to the International Monetary Fund.

The central bank has effectively pegged the naira at 197 to 199 per dollar since March by restricting imports of products from glass to wheelbarrows, halting supply of foreign currency to exchange bureaus and all but shutting down the interbank market with trading limits.

While Emefiele acknowledged the need for improving liquidity, he said policy makers were also committed to naira stability.

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Nigeria has resisted devaluation while oil-producing nations from Angola to Russia and Mexico have let their currencies weaken.

The naira was trading at about 306 per dollar on the black market on Tuesday. Naira forwards soared after Emefiele’s speech, suggesting traders have lowered their expectations of a devaluation.

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Naira three-month non-deliverable forwards rose to 229.25 per dollar at 6 a.m. on Wednesday in Lagos, from 250.5 on Tuesday.

Bloomberg reports Nigerian economy is facing disaster

“Oil has gone lower than anyone thought it was going to and that didn’t change their mind,” said John Ashbourne, an economist at Capital Economics Ltd. in London.

“A weaker economy didn’t change their mind, and now you have a huge gap between the parallel market and the official market and that hasn’t changed their mind either,” he said.

“I’m not sure what would be the sort of straw that breaks the camel’s back.”

Confidence and interest rates dropping

The currency controls have knocked investor confidence, with foreign inflows dropping by 32% last year, the Nigerian Stock Exchange said in a report on it’s website on December 19.

The benchmark equity index is down 17% this year, the worst performer globally after gauges in Shanghai, Saudi Arabia and Hong Kong.

The central bank has favored lowering interest rates to help support growth in the hope that banks will boost lending.

READ ALSO:  Joshua Dariye faces corruption charges after nine years

The MPC reduced the benchmark rate by 200 basis points to 11% in November and kept it unchanged on Tuesday.

“The bank wants to encourage credit and stimulate the economy,” said Lanre Buluro, an analyst at Primera Africa Securities Ltd..

“However, I don’t see the banks lending in the near term because of low economic activity.”

Dithering over devaluation

Emefiele has the backing of President Muhammadu Buhari, who has said he does not favor a currency devaluation.

Buhari took office last year on a wave of optimism to fix the economy, fight corruption and combat attacks by Boko Haram militants.

“The president has indicated that he does not believe that a devaluation is the appropriate thing to do at this time,” said Ike Chioke, chief executive of Afrinvest West Africa Ltd..

“It appears the decision on foreign exchange has been moved to a level above the central bank.”

READ ALSO:  Afinefere warns Buhari against selective anti-graft war

If you want to keep track of the issues and events that will effect the economy and the strength of the Naira, you can read our updates on the price of oil and the Naira - US Dollar exchange rate on the parallel market.

If you want a sneak peak, here's one of our fantastic infographics on the naira and crude oil prices.

Bloomberg reports Nigerian economy is facing disaster

Source: Legit

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