• Shrinking GDP confirms naira peg hurting economy

Obinna Chima
with agency report
A member of the Monetary Policy Committee (MPC) of the Central Bank of Nigeria (CBN), Dr. Doyin Salami has argued again that the currency restrictions are hurting the economy and fueling inflation, proposing that the naira should be devalued by 10 percent.

Salami, an academic, who lectures at the Lagos Business School, voted at the January meeting to weaken the midpoint of the currency band to N220 per dollar from N197, according to personal statements of members of the MPC published on the central bank’s website. He also proposed widening the exchange-rate band to 5 percent around the midpoint, according to Bloomberg.

With the backing of President Muhammadu Buhari, the CBN under Governor Godwin Emefiele has rejected calls to devalue the naira despite a plunge in oil prices that’s slashed revenue in Africa’s biggest crude producer. The bank has instead effectively banned imports of some goods and restricted foreign currency supply, pegging the naira at N197 to N199 per dollar in the past year.

That however has not stopped the black-market rate from soaring to about N320 against the dollar, adding to costs in the economy as businesses turn to the parallel market to access foreign currency.

Inflation, which was unchanged at 9.6 per cent in January, has been above the central bank’s target band of 6 per cent to 9 per cent since June.

“The central bank’s concentration on exchange-rate stability seems to have led to abandonment of its price stability/inflation objective,” Salami said. “We are, unnecessarily, paying –- in the form of eroding confidence, slowing growth and increasing joblessness of our population –- a needlessly heavy price.”

Salami is a lone voice among 12 MPC members seeking devaluation. In August, he said the currency restrictions would slow economic growth and have confused foreign investors.

Nigeria’s gross domestic product (GDP) rose 2.8 per cent last year, the slowest pace since 1999 and down from 6.2 per cent in 2014, the National Bureau of Statistics (NBS) said on Tuesday.

“The majority of the committee is expected to toe the line of the president,” Ayodeji Ebo, head of research at Afrinvest West Africa Ltd., said by phone from Lagos. “His persistent statements against devaluation will influence the MPC’s decision because of the way the committee is nominated.”

Nigeria’s economic growth data also confirmed what Emefiele has been loath to admit: that currency controls are hurting the economy, Bloomberg added.
Industrial output contracted 2.2 per cent last year, compared with expansion of 6.8 per cent in 2014.

Tumbling oil prices have battered Nigeria, a country that relies on crude for two-thirds of government revenue. Capital controls and restrictions on currency trading imposed by the central bank to prop up the naira — and backed by Buhari — have made matters worse.

Rather than benefiting manufacturers, as Emefiele has claimed, the GDP data showed industries such as food and vehicle production continue to suffer.

The figures “confirm widespread fears of a slowdown, possibly even a recession,” Alan Cameron, an economist at Exotix Partners LLP in London, said in an e-mailed note. “The lack of investment and access to imported inputs has hamstrung the corporate sector, and is increasingly being felt by the man on the street.”

GDP rose 2.1 per cent in the fourth quarter from a year earlier, down from 2.8 per cent in the previous three months and lower than the 2.9 percent median estimates of 11 economists surveyed by Bloomberg.

The central bank’s measures have effectively hindered the ability of manufacturers to pay foreign suppliers. They have also caused investors such as Aberdeen Asset Management Plc and Ashmore Group Plc to sell naira bonds and stocks.

Nigeria’s main stock index has fallen 9.8 per cent this year, more than any other bourse in Africa apart from Zimbabwe’s. Forwards prices suggest the naira will drop 31 per cent to 288 in a year, while the black market rate is around N320 to the dollar.

Brent crude oil has plunged 28 per cent in London since the beginning of last year and was trading as low as $40.62 a barrel yesterday.

Buhari became the first opposition leader to win power in Nigeria last year, riding on a wave of optimism that he would fix an ailing economy, end an insurgency by Boko Haram in the northeast and combat rampant corruption.

While he has scored some successes in fighting the militants and tackling graft, investor confidence in his economic policies have waned.

“We see some scope for faster growth, forecasting the economy to expand by 3.8 per cent this year,” David Faulkner, an economist at HSBC Holdings Plc in Johannesburg, said in a note to clients. “However, much will depend on Nigeria’s exchange rate policy, with the current foreign exchange and import restrictions — imposed to stabilize the naira — having a detrimental effect on economic activity and growth.”

But there is little to suggest the economy has improved so far this year, according to Manji Cheto, an analyst at Teneo Intelligence in London. While the government plans to boost growth with a record $30 billion budget, lawmakers are yet to pass it.

“Growth for the first quarter of this year could be worse because nothing has happened,” Cheto said by phone. “Government hasn’t yet ramped up spending since we don’t have a budget. The performance in this quarter will drag growth down for the rest of the year. It confirms that Buhari’s government has been very slow off the line.”