Nigeria’s quest to reclaiming economic stability

Sentiment towards the Nigerian economy received a painful blow in July following the shocking reports that the nation had slipped into a technical recession. Africa’s largest economy has been heavily pressured by falling commodity prices, while external global uncertainties continue to expose the nation to noticeable downside risks.

It should be kept in mind that approximately 70% of Nigeria’s government revenues are attained from oil sale,with the incessant declines in oil prices sending shockwaves across the board. Amid this turmoil, the renewed militancy in the south of Nigeria which has seen crude oil exports tumble to 27 year lows continue to enforce further pressures on an economy that is already in a very delicate situation.

The Naira has been pressured since the de-peg with the currency hitting record lows of 330 per Dollar on the official markets as traders examined lower levels to attract liquidity amid theCentral Bank of Nigeria’s (CBN) inaction. A combination of Dollar appreciation, depressed oil prices and concerns of diminishing domestic growth have created a foundation for bears to install repeated rounds of selling momentum on the Naira. Further Naira weakness could be expected in the future as the natural forces of supply and demand determine its true equilibrium value.  Although there remain concerns over the Naira devaluation punishing the Nigerian economy further, the benefit of an increase in foreign investments in the long run could overshadow fears of rising inflation. From a technical standpoint, the Naira is bearish and could weaken further against the Dollar on both the official and black market exchanges.

Speaking of inflation, Nigeria’s inflation lurched to the highest rate in almost 11 years as the mixture of Naira vulnerability and persistent concerns over the domestic economy punished purchasing power. The sharp rise in inflation of 16.5% in June should be no surprise following the CBN’s decision to de-peg which sent prices on a steep decline. Although inflation is at a worrying rate, the longer term impacts could elevate GDP growth, consequently boosting investor risk sentiment. With uncertainty still an ongoing theme in the financial markets, most central banks have adopted a cautious stance and this could also affect the Central Bank of Nigeria. While it is widely expected that the Central Bank will keep policy measures unchanged in the upcoming July meeting, interest rates could be hiked before year end as a method to stabilise inflation while reducing some pressures on the Nigerian economy.

Global markets are still unstable from the post-Brexit uncertainty which has sent shockwaves across the board consequently punishing many nations. With Nigeria still a member of the Commonwealth, the painful impacts of the Brexit could indirectly have an effect on the fragile Nigerian economy. Fears have already heightened over a potential Brexit fuelled recession in the UK economy and this could erode the amount of foreign investments towards Nigeria. The ramifications of a decline in foreign investments may depress Nigeria’s GDP growth while reinforcing further pressure on the nation that is currently entangled in losing battle with depressed oil prices.

Major financial institutions, such as the International Monetary Fund (IMF), have cut Nigeria’s growth forecasts for 2016 which hasweighed heavily on investor confidence. The nation’s growth predictions for this year have been predicted to contract by 1.8%, a very sharp drop from the previous 2.3% forecast in April. While speculations have mounted over this probable decline in GDP growth, Nigeria’s finance minister Kemi Adeosun has said that there should be no panic. Her positivity can be commended and if Nigeria follows the blue print of diversification then the future could potentially look bright for the nation.

Before Nigeria embarks on its quest to economic stability, questions must be asked over the Central Bank of Nigeria’s policy measures which may have enforced further pressures in this period of declining oil prices. The initial Naira-Dollar peg at 197 heavily diminished the nation’s foreign exchange reserves while ban of foreign exchange currency cash deposits punished domicile citizens. Transparency is lacking and this can be seen with the stealth intervention implemented by the CBN after the first initial announcement of the Naira de-peg in June. With the Central Bank saying one thing and doing something completely different, this could inevitably repel foreign investors consequently leaving the economy pressured. As of now, the Naira is the worst performing currency in Africa and this could be a recurrent theme if changes are not put in place.

The problem Nigeria faces is falling oil prices and the solution is diversification. It should be kept in mind that diversification is critical for the nation to be self-reliant with efforts to revitalizing agriculture, fixing infrastructure and an expansion on taxation bolstering economic growth. With the CBN taking the initiative to truly de-peg the Naira against the Dollar, there are hopes that the attracted foreign investment and also increase in domestic competition elevates the economy in the longer run. The country has already entered a currency deal with China in attempt to reduce the pressure of Dollar demand. Since over 70% of Nigeria’s imports come from China, this deal could be beneficial in the long term.

Questions should also be raised over the existence of Nigeria’s black market exchange which has also spiralled out of control with the Naira trading at 378 to the Dollar. It seems that the lack of liquidity and 41 banned items which cannot be purchased on the official exchange has naturally attracted investors to dabble into the black markets. If the Central Bank of Nigeria wants to eradicate the disparity between the black markets and official, then the best action could be to remove the banned items. Rather than banning the items on the exchange it could be more effective to enforce rules which make it difficult for these same items to enter the country.

Currency stability and economic growth are key factors that naturally attract foreign investors. If Nigeria succeeds in doing this via diversification and transparency, the future of the world’s largest African economy could look bright. It must be understood that the cause of Nigeria’s woes has been the painful declines in oil prices which have punished government revenues while also weakening the Naira. With diversification already in progress and the Naira de-pegged, the first steps taken to reclaiming self-reliance and stability have been taken. It is visible that Nigeria has entered a recession, but if the nation can weather this period of uncertainty then the positive outcome may exceed all expectations.