Nigeria: Hurt So Good
According to the Central Bank of Nigeria website, Monday's removal of the naira fix against the US dollar, which had seen it pegged at just under 200N per $ since early 2015 and almost crushed Africa's largest economy, resulted in a 30% decline to 280. With the CBN stressing that it hasn't completely abandoned the intervention game, the odds of a further slide towards 300 look unlikely for now. But I wouldn't put the mortgage of any of my clients on it.
Upward short-run pressure on inflation and interest rates look inescapable, although the actual pass-through may be fairly muted given that the policy shift was both anticipated and well-trumpeted. However, it has come far too late to prevent Nigeria sliding into a full-blown recession in Q2 (output contracted by 0.4% y/y in Q1).
Meanwhile, the medium-term ticks - which should bear harvestable fruit just in time for the 2019 elections - include:
an improvement in fiscal position, which has been battered by the oil price decline as well as renewed unrest in the hydrocarbon-rich Niger Delta that has pushed output towards a 30-year low of 1.4m barrels a day;
a rise in national creditworthiness on the back of a more sustainable policy framework which will reduce borrowing costs for much needed infrastructural, health and educational spending;
a recovery in international reserves which have been pummelled on the altar of the dollar peg to around four months of imports - anything below three months is generally entering an economic red zone
On its own, a more market-driven FX regime won't prompt a return to the 7% average GDP growth seen in the decade before the 2014. But the current bout of discomfort will ultimately be beneficial if it triggers a real and sustained push towards broadening the tax base while simultaneously diversifying the economy towards manufacturing.How optimistic should we be?
Admittedly, the Buhari administration has been quite explicit in its, sometimes cack-handed, willingness to grasp the nettles. On the other hand, as Nigeria's Chief Statistician, Dr Yemi Kale, recently pointed out, such aims have, purportedly, been at the top of the policy agenda of every government since independence five decades ago.