Economic Recovery in Nigeria Hobbled by Oil, Currency Policy

LAGOS (Capital Markets in Africa) Nigeria’s economy may struggle to rebound from its worst slump in 25 years unless President Muhammadu Buhari can end an armed conflict in the nation’s oil-producing region and fix a currency policy that’s blocked investment.

Pipeline attacks in the Niger River delta cut oil production by a third last year, slashing government revenue, while central bank intervention and trading restrictions that prop up the value of the naira have stymied trade and investment. A more favorable oil and foreign-currency environment could help the economy expand, analysts say. The International Monetary Fund estimates gross domestic product contracted 1.5 percent in 2016.

“It’s oil prices and production from the delta that will determine growth,”Ogho Okiti, chief executive officer of Time Economics Limited, said on Wednesday from Abuja, the capital. “When monetary authorities floated the naira, they expected fiscal policies that attract investment and boost activity. But that didn’t happen, and as a result no one has confidence in the float.”

Lower oil output and global crude prices, and a shortage of foreign currency needed to import everything from food to factory inputs sent the economy into its deepest slump in more than two decades last year. The central bank, battling inflation at an 11-year high, has rebuffed finance ministry calls to cut record-high interest rates to boost the economy and has pledged to continue measures to manage the currency.

Dollar Shortage
While the central bank scrapped a naira peg of 197 to 199 to the dollar in June, it has intervened to hold the currency at around 315 since August. That compares with a rate on the parallel market of almost 500 to the dollar. The central bank has also blocked importers of selected items from the interbank foreign-currency market.

“We expect the economy to recover, in part because oil-price falls and oil-production declines are behind us,” Stuart Culverhouse, chief economist atExotix Partners LLP in London, said by phone. “The extent of recovery will depend on normalizing the FX situation which is still a constraint on the economy.”

A shortage of dollars needed to repatriate profits forced some airlines to reduce flights to Nigerian destinations, while in manufacturing, investors including Africa’s richest man, Aliko Dangote, have held back expanding some of their businesses.

“There are no imminent plans for further FX liberalization,” said Razia Khan, head of Africa macro research at Standard Chartered Plc in London. “FX will continue to be rationed, with key sectors being prioritized.”

Fitch Ratings Ltd. downgraded the outlook on Nigeria’s credit assessment to negative because of concerns that foreign currency shortages will constrain the non-oil economy. Fitch puts the nation’s debt is rated B+, four steps below investment grade. 

“Access to foreign exchange will remain severely restricted until the Central Bank of Nigeria can establish the credibility of the interbank foreign-exchange market and bring down the spread between the official rate and the parallel market rates,” Fitch said in a statement on Wednesday.

Budget Delay
While an agreement by the Organization of the Petroleum Exporting Countries to cut production has helped increase oil prices, Godwin Emefiele, the central bank governor, warned the boost may be short-lived, and its effect is diluted by lower output. Nigeria produced an average 1.45 million barrels a day in December after militant groups sabotaged pipelines, compared with capacity of 2.2 million barrels, according to data compiled by Bloomberg.

Brent crude oil for March settlement gained as much as 55 cents, or 1 percent, to $55.63 a barrel on the London-based ICE Futures Europe exchange. The price has jumped 75 percent over the past year.

Any repeat of last year’s five-month delay in implementing the budget would also likely scupper a rebound. Buhari has proposed boosting investment in power, rail, roads and ports to target as much as 2.5 percent growth.

The government should use policies that attract private capital because increasing public spending alone won’t be sufficient to revive the economy,Ayodeji Ebo, senior associate for investment banking at Afrinvest West Africa, said by phone.

“Last year, because of the challenge of meeting revenue targets, capital expenditure suffered,” he said. “I see the same pattern this year.”