The effective implementation of a new foreign exchange mechanism and liberalisation of the fuel sector will face fresh hurdles following the United Kingdom surprise vote to exit the European Union, a report has stated.
EXX Africa, in a special report on the likely impact of Brexit on Africa, held the view that Nigeria will also struggle to attract interest in new debt sales aimed at financing its expansive budget.
Furthermore, the report argued that the main impact of a ‘Brexit’ on Nigeria would be further deterioration of the country’s already struggling economy, which was caused by the fall in global oil prices and a steep drop in local crude production due to an insurgency in the Niger Delta.
It noted that there is extensive trade and security cooperation between the UK and Nigeria that would likely face several years of disruption as the UK departs from the EU.
“Nigeria is the UK’s second-largest export market in Africa. Bilateral trade between the two countries is currently worth $8.3 billion and projected to reach $25 billion by 2020. The UK is also Nigeria’s largest source of foreign investment, with assets worth over $1.4 billion.
Moreover, UK-Nigerian remittances account for USD21 billion a year. The UK is also one of the largest development assistance donors to Nigeria, although Nigeria is not as aid-dependent as most continental counterparts.
“A slowing UK economy on the back of a departure from the EU and potential disruption as the UK renegotiates its trade agreements, would be likely to reduce trade flows, foreign direct investment, and Nigerian remittances. There is also no guarantee that other EU countries will make up the UK shortfall in trade and investment, as other EU countries look to Iran for more reliable access to oil and to Asia for cheaper labour,” the report stated.
On 24 June, equities listed on the Nigerian Stock Exchange ended a three-day rally, falling 1.4 per cent over worries of Britain’s vote to leave the EU. Nigerian banks, such as Fidelity Bank and Zenith Bank, recorded the biggest losses.
Nigerian stocks had previously rallied 8.5 per cent after the government floated the naira and ended a highly controversial currency peg.
“As a result, new portfolio inflows will slow, which will hamper the implementation of the country’s new foreign exchange mechanism,” the report added.
The Central Bank of Nigeria recently introduced a more flexible foreign currency policy, removing a de facto peg of around N197 to the dollar.
“The naira’s 16-month peg to the dollar had overvalued the Nigerian currency, resulted in an economic contraction, and harmed investments. The implementation of the fuel sector liberalisation, including the termination of a burdensome state-subsidy scheme, would be likely to face implementation issues.
According to the report, “The sector’s liberalisation will add to fuel importers’ margins and will allow shipments of fuel to resume. The liberalisation of the fuel marketing sector and the proposed introduction of a flexible exchange rate are both aimed at soothing foreign investor concerns and to attract new fundraising to finance a record budget deficit widened by a fall in oil revenues.
“The effective implementation of the new currency regime and establishing its credibility will be key to attracting new foreign direct investment and portfolio flows. Beyond trade and investment, the UK is also a key partner in Nigerian security.
“The UK has been crucial to drawing international attention to the Islamist Boko Haram insurgency in Nigeria’s northeast. There is a risk that the UK would become distracted from international security threats, such as those by Boko Haram, as it negotiates its departure from the EU. However, the US and France have proven more crucial partners than the UK in combating Boko Haram, thus mitigating the effect on counter-insurgency efforts,” it stated.
Finance Minister Kemi Adeosun is due to launch a planned Eurobond sale later in 2016. The government plans to raise $10 billion of new debt of which $5 billion would come from foreign investors.