NIGERIAN central bank governor Godwin Emefiele is losing the battle to prevent the naira from going the way of other oil-dependent currencies.
After he imposed 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% decline in the currency in the 12 months to February 12 to a record low of 206.32/$.
That is heaping pressure on the authorities to ditch the rules and let the naira weaken alongside Russia’s rouble, Colombia’s peso and Norway’s krone. Forward prices suggest the currency of Africa’s biggest oil producer will tumble 15% within six months and 25% over the next year.
“Their currency is still very overvalued, so they’re going to remain under pressure to allow it to depreciate,” says Gareth Brickman, an analyst at ETM Analytics.
The central bank had fought depreciation “tooth and nail, every step of the way”, he says.
Mr Emefiele says that the exchange rate is “appropriate” and argues that allowing it to weaken will stoke inflation in a country that imports close on all of its manufactured goods.
The strong currency and a scarcity of dollars are hurting the country’s growth, which the International Monetary Fund estimates will be 4.8% this year, less than half the average over the past decade.
Traders are wagering Mr Emefiele will have to change tack and abandon efforts to crack down on speculators. He bolstered the rules after a strategy of burning through foreign reserves failed to stop the naira sliding.
Mr Brickman predicts the central bank will be forced to devalue the currency by about 10% by year-end to 220/$, from 199/$ during early afternoon in Lagos yesterday.
Currency trading had “dropped dramatically” under the new rules, says Craig Thompson, a broker at Continental Capital Markets. “It’s a fraction of what used to go through.”
The trading curbs, together with the more than 50% drop in oil prices since the middle of last year, are weighing heavily on Nigeria, which relies on crude for almost all its foreign earnings. Banks are increasingly wary of lending to individuals and Nigeria’s main stock index has dropped 16% since the start of April, matching the decline in the whole of last year.
Ibrahim Mu’azu, a spokesman for Nigeria’s central bank, defends its currency policy and says authorities will meet companies’ legitimate demand for foreign exchange.
Scrapping the rules is all but inevitable to many traders, making a weaker naira an obvious bet.
Standard Chartered, which gets more than half its revenue from emerging markets, predicts a decline to 222/$ by year-end, while Goldman Sachs sees it falling to about 230/$.
Forward prices compiled by Bloomberg signal levels of 228.15 /$ in six months and 248.5/$ in a year.
Mr Emefiele, a former CEO 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 price.
Angola’s kwanza, which has slumped 23% in the past year, has been little changed this month as the country props up the exchange rate by spending reserves and rationing access to dollars. As with the naira, that is just storing up losses for the future, says John Ashbourne, an Africa economist at advisory firm Capital Economics.
He sees the naira falling as much as 8% to 210-215/$ and the kwanza losing up to 15% of its value by year-end.
China’s yuan devaluation this month has increased pressure on their central banks to devalue, Mr Ashbourne says.