Nigeria’s problems defy central bank fixes

July 28, 2016

 The author is a Reuters Breakingviews columnist.  The opinions expressed are her own.

Sometimes one’s best just isn’t good enough. A little more than a month after scrapping an economically damaging currency peg, Nigeria’s central bank on July 26 raised interest rates by a hefty 2 percentage points, to 14 percent. It’s a reasonable response to a slump in the Nigerian currency, the naira, that scared away foreign money and is fuelling inflation. It will not do much though to restore the investment lure of Africa’s biggest economy.

Lower crude prices have badly hit an OPEC member whose non-oil government revenues are just 4 percent of GDP, one of the lowest among major commodity producers. The budget deficit doubled in 2015, to about 3.7 percent of GDP, and as exports slumped the current account swung into deficit too. Both will widen further.  Militant attacks are disrupting oil production, but resuming payments to protect pipelines would run counter to President Muhammadu Buhari’s anti-graft drive.

Meanwhile, stagflation looms. The economy is on the brink of recession and the inflation rate – which hit 16.5 percent, its highest in nearly a decade, in June – will rise further. Import prices are surging because the naira has lost more than a third of its value against the U.S. dollar since the peg was scrapped in June.

The central bank may hope its rate hike will shore up the currency and lure back investors. But real rates are negative even after the tightening. And while the central bank has loosened its grip on the exchange rate, private sector analysts say the naira is still not floating freely and that liquidity in the interbank currency market remains very poor. Investors will be loath to dive back in until they are convinced the exchange rate reflects the true state of supply and demand for hard currency.

That might take a while. Renaissance Capital analysts reckon the naira could lose another fifth of its value and slide as far as 390 per dollar by the end of the year if the experience of fellow oil-exporter Kazakhstan, which floated its tenge currency in August 2015, is any guide. Things are getting worse. The best efforts of the central bank are merely slowing the pace at which that happens.

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