Inflation

Business Insider/ Nigeria is finally going to do the painful thing everyone said it has to do.

The central bank announced on Wednesday that the naira peg will be abandoned on Monday, June 20, and the currency will be allowed to float freely.

Although, Central Bank of Nigeria Governor Godwin Emefiele also said that the bank will intervene “as the need arises.”

As for what this means for Nigeria’s economy, in the short-term it’s going to get ugly. But in the long-term, things should start to pick up.

“Over the long-run, a weaker currency will help Nigeria’s economy by encouraging import substitution and attracting foreign investors, who have shunned the country for fear of a devaluation,” wrote Capital Economics’ Africa economist John Ashbourne in a note.

“But the move will be painful over the short term. Higher import prices will add to inflation, which reached 15.6% y/y in April. This will probably force the authorities to tighten monetary policy,” he added.

Plus, if Nigeria’s central bank can’t get inflation back under control, then the country might end up getting stuck in a “vicious” cycle of high inflation that leads to a weaker naira, noted Marc Chandler, the global head of currency strategy at Brown Brothers Harriman. And that, then, could lead to higher inflation.

“This is one reason why devaluations can be so painful, as central banks typically jack up interest rates afterwards. Recessions are often seen post-devaluation,” he wrote. “Yet if Buhari has finally relented on maintaining what we viewed as an unsustainable peg, the longer-term outlook for Nigeria will have improved.”

Analysts have long been arguing that Nigeria will eventually have to capitulate and devalue its currency given that the government’s controversial agenda of currency and price controls created a bunch of economic stresses in Africa’s largest economy. Most recently, inflation soared to a six-year high.

Still, devaluing the currency peg will not magically fix all of Nigeria’s problems.

The country continues to suffer from numerous headaches, including lower oil prices, the fuel-shortage crisis, and ongoing oil-production disruptions by the Niger Delta Avengers. Plus, the Nigerian Bureau of Statistics recently revealed that the country’s economy shrank by 0.4% year-over-year in the first quarter, which was way worse than expected.

“A weaker currency is, at best, a necessary but insufficient condition of an economic recovery,” concluded Ashbourne.

But at least it’s a step in the right direction.

Business Insider – Africa’s largest economy is failing to keep inflation under control. Nigeria’s inflation accelerated to 15.6% in May, up from 13.7% in the previous month, according to the National Bureau of Statistics.

That’s the highest rate in over six years, and above economists’ expectations of 14.7%.

The continued rise in Nigerian inflation over the last few months has been attributed to the government’s controversialagenda of currency and price controls, including on petrol.

Nigeria has attempted to hold its currency, the naira, fixed at 200 per dollar on the official FX market by rationing the supply of dollars. So, as a result, consumers have been trying to get dollars from the parallel market, where the exchange rate was 320 nairas per dollar, according to March figures.

As for the second policy, Nigeria attempted to fix the retail cost of petrol at 86.5 nairas per liter, which has resulted in one of the worst fuel shortages in years.Petrol prices on the black market and other utility prices have, unsurprisingly, skyrocketed in the aftermath.

“Given that both the naira policy and the petrol pricing strategy were originally presented as methods of keeping prices down, the continued rise of inflation is a significant blow to the government’s economic strategy,” Capital Economics’ Ashbourne noted previously.

On the positive side, in late May, the government finally admitted that it needed a more flexible exchange rate. And there have recently been reports that the Central Bank of Nigeria is thinking about introducing a dual exchange-rate system and devalue its currency.

But, for now, “today’s data underline the failure of the current FX system to keep inflation under control,” according to Ashbourne.

Commuters peer from a broken window on a public bus in Lagos, March 27, 2009. Nigeria continues to suffer from numerous economic headaches including lower oil prices and the government's controversial foreign-exchange and price-control policies (which analysts have more or less deemed a failure.) — File photo: Commuters peer from a broken window on a public bus in Lagos. Nigeria continues to suffer from numerous economic headaches including lower oil prices and the government’s controversial foreign-exchange and price-control policies (which analysts have more or less deemed a failure.)

Nigeria’s economic crisis is getting worse.

On Friday, the Nigerian Bureau of Statistics revealed that the economy shrank by 0.4% in the first quarter year-over-year — which was way worse than expected.

Economists were expecting the country to grow by 1.8% year-over-year, according to the Bloomberg consensus.

And now, analysts aren’t feeling too good about the situation going forward.

“We have long warned of a slow-burning crisis in Nigeria. It now seems that this view was too optimistic: the country is headed into a full-blown economic crisis,” argued Capital Economics’ Africa economist John Ashbourne.

Nigeria continues to suffer from numerous economic headaches including lower oil prices and the government’s controversial foreign-exchange and price-control policies (which analysts have more or less deemed a failure.)

Notably, the biggest drop in growth was in Nigeria’s manufacturing sector, which Ashbourne writes was crushed by the FX policies.

“This is very bad news for Nigeria’s government, which has justified the current FX system as a method of promoting non-oil industries,” points out Ashbourne. “It is now clear that these policies have — as we’d long argued — made a bad situation worse.”

Still, the scariest thing about this latest GDP number is that it doesn’t factor in any of the debilitating problems Nigeria has seen in the second quarter, including, but not limited to, the fuel shortage crisis and some of the oil production disruptions by the Niger Delta Avengers.

In short, as Ashbourne concludes grimly, “the worst is yet to come.”

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