Nigeria which faces a second recession in four years can speed up the recovery of her economy by stepping up efforts at easing pressure on the foreign exchange market, the World Bank has said.
Nigeria has twice adjusted her currency in recent times but the World Bank which acknowledges the moves, says Africa’s largest economy can and needs to do even more in this regard according to a report by Bloomberg.
World Bank country director for Nigeria Shubham Chaudhuri says the resumption of dollar sale in Nigeria after a five-month stoppage is welcome, but adds that “continued and even stronger action and a clear commitment from the central bank will go a long way toward facilitating a stronger recovery.”
Nigeria halted its weekly interbank foreign-currency sales in March as oil prices collapsed and the economy entered a pandemic imposed shut down.
However, while peer economies have suffered worse contractions following the outbreak of the coronavirus and subsequent lockdown, Nigeria’s GDP numbers for the second quarter showed a 6.1% shrinkage and this is giving hope of an early recovery.
Businesses and importers have struggled in the face of measures to defend the Naira and preserve foreign reserves as their operations suffer and they lose capacity to repay dollar debt.
The Financial Times reported on Thursday that the World Bank backed power plant Azura, faces a default on its dollar-denominated debt because of the dollar scarcity.
“The Azura case is just one example of the difficulties that a number of established foreign and domestic private firms in Nigeria have had in accessing the forex to meet their business and contractual obligations,” Chaudhuri said on Friday.
From banning the use of agents in import transactions to calling out exporters that don’t repatriate proceeds, Nigeria is trying to avoid another Naira evaluation.
On Thursday, President Muhammadu Buhari ordered it to stop providing foreign exchange for food and fertilizer imports.
The official naira rate has lost a quarter of its value and now analysts say the local currency risk that’s keeping foreigners from the Nigerian market could be a golden opportunity for local investors.
According to a London-based fund manager who’s dumped all his Nigerian assets while the probability of a naira devaluation remains a turn-off for foreign investors, it could boost the local stock market, as it happened in Zimbabwe.
Erik Renander, a portfolio manager at Emerging Markets Investment Management Ltd, the exit of foreign portfolio investors from Nigeria could also bolster confidence in the local market, he said.
“You could be sitting in front of a great opportunity,” Renander said in virtual conference. “Generally, when the currency devalues, the local stock market goes up a lot.
“Maybe the naira is going to go to 550 per dollar, and the Nigerian stock market could go to 50,000; you could easily have a double.”
Domestic participants accounted for 60% of transactions on the Nigerian stock exchange this year, according to the bourse head, Oscar Onyema. Excess liquidity has pushed yields on fixed-income instruments to low single digits.
The naira which has been under sustained pressure traded at 386.55 per dollar in the official market on Friday, compared with a black-market rate of 455.
Investors believe the naira, which has been devalued twice this year, could still be overvalued and Bank of America analysts said last month they expect further adjustment of the local unit to 430 per dollar next year.
