FREEFALL

Nigeria 2017 | FINANCE | FOCUS: NAIRA

Nigeria's currency woes in light of falling oil revenues necessitate an urgent and appropriate policy by the government to regain its financial independence.

Exacerbated by the fall in oil prices and attacks by militant groups in the northeast and the Niger Delta region causing alarm among investors, Nigeria's financial reality presents one of the toughest challenges for the African hegemon. With inflation skyrocketing to 18.48% YoY in November 2016 and rising, the federal government's search for alternatives to alleviate the country's finances have taken a turn for the worse. Respondents of the World Economic Forum's Global Competiveness Report (GCR) listed inflation as the eighth-most problematic challenge to conducting business in Nigeria, as high levels of inflation are draining foreign exchange reserves and making Nigeria susceptible to import inflation, especially in the case of food and refined oil products. In order to respond to this emergency, the Buhari government has constantly pushed for the diversification of the economy away from oil and into other sectors.

On the verge of a recession, the budget deficit is struggling like never before as the economy contracted for the first time in 12 years. In an effort to combat the steep decrease in oil revenues, in March 2016 the Central Bank of Nigeria (CBN) restricted access to foreign exchange and pegged the naira to the dollar at around NGN197. This decision left many analysts scratching their heads as several other oil-producing countries decided to go the opposite direction and weakened their currencies by establishing a flexible exchange rate in order to deal with oil depreciation. In fact, it took only a few months for the Central Bank to change strategy again. In June 2016, the CBN allowed the value of the naira to be determined by market forces with a flexible exchange regime.

The government's initial financial resolution to devalue the naira in contrast to measures proposed by the IMF had expensive consequences. Forex reserves were lower than a decade ago, and the dollar shortage had a direct impact on the naira's value on the parallel market, causing foreign investors to rethink the sustainability of their present and future operations in Nigeria. In July 2016, six weeks after the naira began to float, the currency lost nearly 30% of its value, becoming almost certainly the worst-performing currency of 2016.
On another front, Nigeria's debt-to-GDP ratio, which was ranked seventh best in the world in the most recent GCR survey, is expected to rise to 20% following budget deficits that could last for at least three years. With a weak naira and inflation being the highest in decades, Nigeria's preoccupying financial situation is in dire need of the appropriate and urgent response by the government. The fact that President Buhari has showed willingness to compromise and rethink its financial strategy is a good, but late, indicator that Nigeria will take the right steps toward regaining its financial independence.

In fact, the government's expectation to regain the trust of foreign investors relies on the credibility of the CBN. In fact, inconsistency and unpredictability seem to be a clear recipe for economic disaster. On top of that, trust has been an issue of constant study among economists. Trust in the banking system, the foreign exchange, and even in a country's institutions and leaders is essential for economic, political, and social development and success. The impact of this issue on Nigeria is seen in the World Bank's 2016 ease of doing business report, in which Nigeria ranks 169th out of 190 countries.

Hit by a slower economy, the number of airline passengers, including investors, visiting Nigeria has fallen steeply. Additionally, the financial obstacles put in place in the country have severely affected the ability of international airlines to repatriate profits, resulting in the pullout of major players like Iberia, and most recently United, which just announced the cancelation of its daily Houston-Lagos direct route. Amidst such periods of uncertainty, other key players like British Airways and Emirates are considering the repercussions of keeping operations in the country if the situation is not dealt with soon. Nigeria's financial subsistence and independence is now, more than ever, on the clock.