Nigeria central bank governor dismisses calls to devalue naira

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Nigeria’s central bank governor has dismissed calls to further devalue the naira amid growing domestic and international concern about the tough outlook facing Africa’s largest economy after the collapse of the oil price last year.

In an interview with the Financial Times, Godwin Emefiele said his controversial decision to restrict imports of food, cement and other critical goods to promote local production will soon strengthen the local currency and boost Nigeria’s dwindling foreign reserves.

Mr Emefiele said that given the major hit to state revenues for the continent’s top oil producer, there was no way to avoid “bad times” for now. But he insisted his protectionist policies — and not the naira devaluation traders and analysts call for — would curb inflation and bolster depleted foreign reserves.

“We have begun to get people to refocus?.?.?.?the challenges of the dwindling reserves [are] making people change their paradigms because we are telling people our story and they are beginning to look inward,” he said.

Nigeria’s finances were destabilised by the oil price crash last year but became even more fragile as political uncertainty in the run-up to elections in the first part of the year weighed heavily on investor sentiment. The International Monetary Fund predicts economic growth will slow to 4.8 per cent this year from 6.3 per cent last year.

Foreign reserves are down more than 20 per cent from a year ago before the global oil price crash.

They stood at $30.69bn in July, up 5.6 per cent from a month earlier but still only providing import cover for five months, according to Ecobank estimates.

Meanwhile, the naira, which has seen its value erode by 19 per cent against the US dollar over the past year, has borne the twin brunt of falling oil prices and a predicted uptick in US interest rates which has sparked capital outflows across emerging markets.

The governor took office last year after his predecessor, Lamido Sanusi, was suspended by the Goodluck Jonathan administration after he exposed multibillion-dollar oil fraud. Mr Sanusi won international praise for his role not only as a whistleblower but also for his handling of the 2008 financial crisis, which restored credibility in the banking sector and more broadly improved the country’s image as a frontier market.

But Mr Emefiele’s protectionist economic stance has panicked local industrialists and bewildered economists. A former chief executive of Zenith bank, one of the country’s largest lenders, Mr Emefiele is also drawing criticism for expanding his role to include fiscal and industrial policy making.

Asked if he was worried about food shortages if the local market could not move quickly enough to supply adequate quantities of rice, tomato paste and other foods, such as tinned sardines, the governor replied: “We are praying that there will not be shortages. But when there is a shortage, that shortage provides business opportunity for Nigerians and foreigners to come and jump in and fill the gap.”

More likely, economists say, is that inflation will continue to rise — in part because consumers are likely to turn to smuggled goods at higher prices. It hit 9.2 per cent last month, above the bank’s band limit of 9 per cent.

Chart: Nigerian naira against the dollar

“We don’t have an issue with wanting to promote self-reliance but what we have a problem with is the way [Mr Emefiele] is managing the foreign exchange market,” says Muda Yusuf, head of the Lagos Chamber of Commerce. “You don’t use the instrument of foreign exchange to discriminate on what products you can get and what you cannot.”

With the official exchange rate locked at 198 to the dollar, the naira last week traded at 240 to the dollar on the black market. It has strengthened this week. On Wednesday the central bank ordered commercial banks to stop accepting US dollar deposits in part to discourage speculation against the naira. The governor said he did not think the parallel market should be used as a benchmark for “determining the real value of Nigeria’s currency”.

Economists argue the spread between official and unofficial rates reflects the need for further devaluation.

We are praying that there will not be shortages. But when there is a shortage, that shortage provides business opportunity for Nigerians and foreigners to come and jump in and fill the gap– Godwin Emefiele, Nigeria’s central bank governor

“He’s trying to control demand not supply. If the only way to control price is to control the demand you are doomed. Demand management does not work,” said a Nigerian analyst familiar with the governor’s thinking who spoke on the condition of anonymity.

The governor suggested that Nigeria’s financial deterioration provided a landmark opportunity to reshape the economy.

“You find that it’s only when you are facing such type of adversity that you are compelled to look inward and work hard to fill that gap,” he said.

Mr Emefiele added that his policies would help prepare Nigeria for a possible interest rate rise by the US Federal Reserve later this year.

Chart: Foreign exchange reserves

He said that implementing his proposed “demand management strategies” will help the country “manage what we have and live with what we have” and reduce dependency on “[capital] flows from America”.

President Muhammadu Buhari, who took office in late May in Nigeria’s first peaceful and constitutional transfer of power, has not yet appointed his cabinet, meaning that Mr Emefiele is one of the government’s few official voices on the economy.

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