Nigeria may have put the cart before the horse by floating the naira before raising market rates and ensuring it had a good supply of dollars with which to intervene in the foreign exchange market when needed. Egypt made no such mistake.
It was hardly a surprise when Egypt devalued its currency last week after over a year of a flawed peg to the dollar that drained liquidity in the FX market and caused the official and unofficial exchange rates to fly apart.
Devaluation bets had swirled around Egypt for months as analysts grew bolder in their predictions that the Egyptian pound will be devalued for the fourth time in two years.
They were emboldened by the worsening scarcity of dollars in the economy and the lack of investor confidence in the monetary policy regime.
The Central Bank of Egypt (CBE) finally bit the bullet and devalued the currency by 38 percent in one fell swoop to 50 EGP per US dollar from 30.8 EGP. The CBE said it will allow the currency trade freely against the dollar from hereon.
While the devaluation was widely expected, it was the action that preceded it that caught many off guard and may prove the difference in whether Cairo’s latest devaluation pays off.
In an unscheduled meeting on the same day the currency was devalued, the CBE hiked interest rates by a record 600 basis points in one fell swoop, its biggest rate hike yet.
With interest rates hiked and the currency devalued, Egypt quickly followed those moves up by agreeing to more than double its rescue program with the IMF to $8 billion.
Egypt also agreed in February to sell the development rights to Ras al-Hikma, a prime Mediterranean resort destination, to Abu Dhabi for $24 billion.
Analysts and investors say the central bank was laying the groundwork for a successful currency float by first raising interest rates by a record and moving to secure some dollar financing.
This was done in realisation of the fact that devaluing the currency may not be sufficient to lure dollars into the economy if interest rates were not raised to make local debt attractive to foreign investors.
Floating the currency without the firepower to intervene in the market when necessary would have also undermined the float, according to multiple economists and investment bankers.
“Egypt learnt how not to float a currency from Nigeria,” a foreign investor who did not want to be named told BusinessDay.
Nigeria devalued the naira last June as part of bold and long-awaited reforms that new President Bola Tinubu wasted no time in delivering in his first few days in office.
The move was cheered and widely seen as the right one by economists who had decried the distortions the artificial official naira rate was creating in the economy.
The gains of the float were however muted by the resistance of the Central Bank of Nigeria (CBN) to raise interest rates in a country with one of the worst negative real returns on investment among African countries.
The CBN also had no substantive governor at the time of the float, with Godwin Emefiele suspended. The leadership vacuum meant investors were starved of the Abuja-based bank’s plan for a gaping dollar demand backlog that contributed to spooking new investors.
There was also no clear path to significant dollar inflows before the float. Promises by President Tinubu and Wale Edun, the finance minister, of an expected inflow of $10 billion have not materialised in months.
With interest rates artificially low and with no clear sight of firepower to defend the naira when necessary, the naira float in June delivered scanty gains.
“Before floating naira, which by the way is a good move, the CBN should have started mopping the excess naira liquidity in the market,” a leading Nigerian economist who did not want to be named said.
“Secondly, there should have been plans to attract the required amount of dollars necessary to ensure the CBN can intervene in the market whenever the naira was under undue pressure,” the economist said.
The naira devaluation last June which paved the way for a 40 percent decline in the currency in 2023 alone should have been preceded by a number of moves that the CBN is belatedly implementing.
The currency has continued on a sloppy path in 2024 after yet another de facto devaluation that has led the naira to shed 30 percent of its value against the dollar in less than three months.
A dollar sold for N1627 in official trading on Friday, a new record low, according to data by FMDQ Securities Exchange.
“The CBN is now doing the right things but there’s still the question of dollar supply that is undermining the reforms and causing the naira to slide,” an economist who consults for a leading multilateral organisation said.
Some economists were of the view that Nigeria should tap the IMF for a sizable dollar loan. Kingsely Moghalu, a former deputy CBN governor, urged the government to take a $30 billion stabilisation package from the IMF.
Asset sales and government dividend securitisation were also highlighted as ways to raise dollars. Nigeria has explored the latter but with fleeting success.
In commending the CBN’s latest reforms, analysts at US-based Goldman Sachs said Nigeria is finally emerging from a period of monetary policy transition characterised by an absence of a credible policy anchor and deeply negative real interest rates.
“That said, the policy steps implemented to date are only a first step in the right direction, and we think more follow-through is required to achieve a durable macro stabilisation,” the Goldman Sachs analysts said.
In the meantime, Nigerians are bearing the brunt of the poorly sequenced reforms despite their long term gains, with inflation peaking at a 19-year high of 29.9 percent, businesses shutting down and unemployment rising.
The tough times won’t last, however, according to Benedict Oramah, president of the African Export-Import Bank (Afreximbank), reforms were necessary to revamp the country’s economy, stressing that things will soon return to normal.
“Nigeria’s choice to float the Naira and remove petrol subsidy are the right decisions,” said Oramah.
“Once you have been able to stabilise the exchange rate, prices will adjust, markets will adjust, and things will return to normal,” he added.
