Nigeria yesterday signaled it will enact some changes to the controversial foreign exchange controls which have won both foes and friends in equal measure.
“Yes you can take this as signaling for 2016 and we will be looking at that direction,” a senior Central Bank official told BusinessDay last night.
Said the official, “we achieved a 21 per cent devaluation sometime ago and now we are in a demand management mode. We have to protect local industries, promote import substitution and when and if we feel we have to make changes, we will do that. Nothing is cast in stone or iron.”
Yesterday Nigeria’s President Muhammadu Buhari hinted for the first time that he would accept a devaluation of the naira, spurring speculation it may take place early next year when the local market reopens for trading.
The Central Bank is fine-tuning the management of foreign “some flexibility” that will encourage additional inflows, Buhari told lawmakers in Abuja, the capital, on Tuesday, as he presented the country’s 2016 budget.
“I am aware of the problems many Nigerians currently have in accessing foreign exchange for their various purposes,” the president said. “These are clearly due to the current inadequacies in the supply of foreign exchange. We are carefully assessing our exchange-rate regime, keeping in mind our willingness to attract foreign investors, but at the same time managing and controlling inflation to a level that won’t harm average Nigerians.”
The president’s change of tone means a devaluation and loosening of currency-trading restrictions may take place about Jan. 4, when the Central Bank reopens the interbank market, which has been shut since Dec. 18 for the Christmas holidays, according to Razia Khan, the London-based head of Africa research at Standard Chartered Plc, which predicts the naira will weaken to 220 per dollar in the first quarter and 228 by the end of 2016.
“There’s recognition that the current system isn’t working and they need to move to something better,” Khan said by phone. “There could be some reset of the mid-rate to a new point, with a band around that. No one expects Nigeria will move to a free-float. That wouldn’t be in keeping with what the president said about keeping the interests of all Nigerians in mind.”
Buhari, a 73-year-old former general who also tried to prevent the currency weakening when he last ruled Nigeria in the mid-1980s, said in September it wouldn’t be “healthy for us to get the naira devalued.” A weaker currency could stoke inflation in a country that imports most manufactured goods and is politically difficult because the public regards the exchange rate “as a performance gauge,” according to Chris Becker, an analyst at Investec in Johannesburg.
Prices of three-month naira forwards weakened 2.3 percent to 226 per dollar on Tuesday, the highest level since Sept. 4 and suggesting the currency will drop 12 percent in that period. Twelve months forwards also fell, predicting a decline of about 25 percent in the naira to 264.5 in a year.
“To the investors, business owners and industrialists, we are aware of your pain,” Buhari said. ”To the farmers, traders and entrepreneurs, we also hear you. The status quo cannot continue.”
The president on Tuesday asked lawmakers to approve the country’s biggest ever budget as he looks to revive the economy expanding at its slowest pace in 16 years. Buhari outlined plans for the government to spend 6.08 trillion naira ($30.8 billion) in 2016, an increase of about 20 percent from this year. The deficit will more than double to N2.2 trillion, or 2.16 percent of gross domestic product. Nigeria has seen its finances battered by crude prices that have fallen almost 70 percent in the past 18 months to below $40 a barrel. The commodity accounts for two-thirds of government revenue.
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