Let that currency float
Meanwhile, the scarcity and overinflated value of Nigeria’s currency is creating liquidity pressures in the financial system. Recently, the Central Bank of Nigeria took measures to ease the situation.
Oil, which has frequently rescued Nigeria from economic decline and provided a buffer in tough times, may not be enough to salvage the country’s economy this time. Brent crude has traded around $55 — a far cry from levels above $100 that once kept OPEC members flush with revenue.
Nigeria, which produces 1.8 million barrels a day of crude, was excluded from a recent deal between cartel members that restricts output in order to boost sagging oil prices. Analysts don’t see that exemption helping in the near term.
“Exhibiting ‘Dutch disease’ type symptoms, Nigeria’s economy has been buoyed by oil-related inflows during the oil price boom,” Phyllis Papadavid, an analyst with the Overseas Development Institute, wrote in a recent report.
“Subsequent naira strength has coincided with a stagnant non-oil sector, which has been at the expense of a largely undiversified manufacturing sector. Looking ahead, CBN naira support at the current rate is consistent with overvaluation,” she said, adding that Nigeria needs to diversify its economy and allow its currency to float freely.
“I think Nigeria can manage with oil around $50-55, but the key is getting actual output up to capacity,” said BBH’s Thin, adding that Nigeria may need to act on stabilizing its currency before seeing any relief.
“The situation is unsustainable, in my view, and Nigeria will likely eventually float the naira,” said Thin. “Egypt faced a similar situation last year and eventually floated its official currency, the Egyptian pound.”
The new central bank policy should help increase availability of FX on the retail side of the market; it remains to be seen to what extent this will ease the backlog.
“The authorities do not seem keen to bite the bullet and let the naira find its own level as driven by market forces, and we see this continuing to put a damper on [foreign investment] and inward portfolio flows,” said Frank Kahumba, a Johannesburg-based senior analyst with Momentum SP Reid Securities, in a research note last month.
— Reuters contributed to this article.
