Analysis: Nigeria’s reform process falters, threatening Africa’s largest economy

by MMC
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LAGOS/LONDON, Sept 28 (Reuters) – The sweeping reforms launched by Nigerian President Bola Tinubu after he took office in May have raised hopes that his administration will be business-friendly. antidote mounting economic problems facing Africa’s largest economy.

Fast forward, after more than 100 days in office, and the key elements of his economic overhaul – freeing the naira from its rigid regime and allowing fuel prices to rise – are falling away.

The naira hit a record low of 1,000 to the dollar this week on the black market, widening the gap with the official rate, which stood at 785 on Thursday.

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Gasoline prices at the pump, for their part, have not changed since July, despite an increase of more than 30% in oil prices.

Some now fear that Tinubu will fail to wean Nigeria from costly policies that have dampened investment and stunted economic growth.

“The dynamics seem…almost reversed,” said David Omojomolo, Africa economist at research firm Capital Economics.

However, public anger is growing as inflation accelerates, and Nigeria’s two largest workers’ unions are considering a unlimited strike next week to protest the cost of living crisis.

“Sentiment towards Nigeria continues to deteriorate as the initial momentum for reforms under President Tinubu’s administration has faded,” said Patrick Curran, an analyst at Tellimer.


For years, Nigeria has tightly controlled the official rate of the naira, even as the price of oil, sales of which account for 90% of the country’s foreign exchange reserves, falls.

But providing dollars at an artificially low rate has led to a yawning gap between official and black market rates, leaving businesses and investors unable to access dollars. The central bank also created import restrictions aimed at reducing demand for dollars.

Tinubu’s decision to let the official rate of the naira weaken caused it to briefly converge with the black market. Last week, he assured investors they would be able to withdraw money, touting a “reliable single-digit exchange rate for the naira.”

But the gap widened to almost 30% this week, and four sources told Reuters it was virtually impossible to get dollars from the central bank on an ad hoc basis.

The new head of the central bank said Tuesday that policymakers faced a nearly $7 billion lag in demand for foreign currencies; Foreign airlines alone lost $783 million in ticket sales, the International Air Transport Association said.

This is one of the major factors that prevent investors from investing money in Nigeria.

Another problem is negative real bond yields and the slow response of central banks: 10-year local government bonds yield less than 15% while inflation is on the rise above 25%.

“What they have done so far is not enough to attract national debt holders or foreign investors to their domestic debt market,” said Carlos de Sousa, portfolio manager at Vontobel Asset Management.

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The tattered finances left by the previous administration weren’t much help either.

In August, the central bank published audited accounts for the first time since 2018, revealing that its $33 billion in foreign exchange reserves included a $19 billion commitment to derivatives, reducing the liquid amount of reserves.

JPMorgan calculated that net foreign exchange reserves stood at $3.7 billion at the end of 2022, “significantly lower” than previous estimates.

This news caused Nigeria’s international bonds to plummet.

“Lower net foreign exchange reserves reduce the willingness to introduce a flexible exchange rate regime in the short term,” said Gbolahan S Taiwo of JPMorgan.

The central bank also maintained other restrictions that businesses say are making life difficult, including a ban on using central bank currencies to import 43 items.

“The government may have intended to make it a free market, but the CBN is not allowing it to be one,” said a Nigerian private equity investor who wished to remain anonymous.

The delay in removing fuel subsidies is exacerbating the dollar crisis. Last year, subsidies cost 2% of gross domestic product, according to Fitch.

Despite being Africa’s largest oil exporter, Nigeria imports almost all of its fuel because it does not refine enough to meet the demand of its 200 million citizens. In recent years, it has swapped crude for fuel, depriving it of a source of US dollars.

It still uses oil cargoes to pay for the fuel it previously imported, and a de facto limit on the pump price set by state oil company NNPC LTD means it is once again the sole importer of gasoline .

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Tellimer said petrol prices in Nigeria would have to increase by 73% to match global prices.

Tinubu, elected by the narrowest margin since Nigeria’s return to democracy in 1999 and facing inflation at a near two-decade high, lacks the social capital and mandate to do so, analyst says. stronger.

“There is a fear that when things get tough…they will go back on reforms,” Omojomolo said.

Additional reporting by Rachel Savage in Johannesburg; Editing by Hugh Lawson

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