Bloomberg/Lagos


Nigerian central bank Governor Godwin Emefiele is losing the battle to prevent the naira from going the way of other oil-dependent currencies.
After imposing trading restrictions in February to prevent dollars from fleeing the economy, importers have been unable to pay suppliers, a thriving black market has sprung up in foreign banknotes and teachers have gone unpaid. The naira has been stable over the past six months since the central bank introduced regulations to halt a 20% decline in the currency in the 12 months through February 12 to a record low of 206.32 per dollar.
That’s heaping pressure on the authorities to ditch the rules and let the naira weaken alongside Russia’s rouble, Colombia’s peso and Norway’s krone. Forwards prices suggest the currency of Africa’s biggest oil producer will tumble 15% within six months and 25% over the next year.
“Their currency is still very overvalued and so they’re going to remain under pressure to allow it to depreciate,” said Gareth Brickman, an analyst at Stamford, Connecticut-based ETM Analytics. The central bank has fought depreciation “tooth and nail, every step of the way,” he said.
Emefiele, 54, has said the exchange rate is “appropriate” and argues that allowing it to weaken would stoke inflation in a country that imports almost all its manufactured goods.
The strong currency and a scarcity of dollars are hurting growth, which the International Monetary Fund estimates will be 4.8% in 2015, less than half the average over the past decade.
Traders are speculating Emefiele will have to change tack and abandon efforts to crack down on speculators. He bolstered the rules after a strategy of burning through foreign reserves failed to stop the naira sliding to a record 206.32 per dollar on February 12.
ETM’s Brickman predicts the central bank will be forced to devalue the currency by about 10% by year-end to 220 per dollar, from 199.05 at the market close in Lagos on Monday.
Currency trading has “dropped dramatically” under the new rules, said Craig Thompson, a broker at Nyon, Switzerland-based Continental Capital Markets. “It’s a fraction of what used to go through.”
The trading curbs, together with the more than 50% drop in oil prices since mid-2014, are weighing heavily on Nigeria, which relies on crude for almost all its foreign earnings. Banks are increasingly wary of lending to individuals and Nigeria’s main stock index has dropped 16% since the start of April, matching the decline in the whole of 2014.
Ibrahim Mu’azu, a spokesman for Nigeria’s central bank, defended its currency policy and said authorities would meet companies’ legitimate demand for foreign exchange.
Scrapping the rules is all but inevitable to many traders, making a weaker naira an obvious bet. Standard Chartered, which gets more than half its revenue from emerging markets, predicts a decline to 222 by year-end, while Goldman Sachs Group sees it falling to about 230.
Forward prices compiled by Bloomberg signal levels of 228.15 in six months and 248.5 in a year.
Emefiele, a former chief executive officer of Zenith Bank - Nigeria’s second-biggest lender by market value - isn’t the only African policy maker trying to protect his currency against the drop in oil.
Angola’s kwanza, which has slumped 23% in the past year, has been little changed this month as the nation props up the exchange rate by spending reserves.
As with the naira, that’s just storing up losses for the future, said John Ashbourne, an Africa economist at London-based advisory firm Capital Economics.
He sees the naira falling as much as 8% to 210-215 per dollar and the kwanza losing up to 15% of its value by year-end. China’s yuan devaluation this month has increased pressure on their central banks to devalue, Ashbourne said.
“The currencies were both too strong before,” he said. “They’re still too strong.”