Nigeria’s central bank pioneers a new method to shore up the local currency

By the Economist

YOU might think Godwin Emefiele, the governor of Nigeria’s central bank, had problems enough. The collapsing oil price has slashed Nigeria’s export earnings. Foreign reserves have fallen from more than $40 billion early last year to just over $30 billion now. In response Mr Emefiele (pictured) devalued the local currency, the naira, in November and again in February. The devaluations are stoking inflation. Like many other central bankers in commodity-exporting countries, he is faced with the unenviable choice of raising rates despite the damage to an already faltering economy, or leaving them be despite rising inflation and a swooning currency. Unlike other central bankers, however, Mr Emefiele has decided to compound the awkwardness of his position by getting involved in industrial policy as well.

Emefiele

Nigerian naira and US dollar

In June the central bank said it would not provide foreign exchange for 41 categories of imports, ranging from wheelbarrows to private jets. The idea, Mr Emefiele says, is both to conserve dollars and to stimulate local manufacturing. “Central banks in developing countries like ours cannot sit idly by and concentrate only on price and monetary stability,” he argues.
Yet manufacturing is not easy in a country plagued by power outages, poor roads and badly trained workers. In the past, protectionist policies have not spawned competitive industries, but lined the pockets of well-connected manufacturers. “If you ban imports, companies will either be forced to compromise on quality or cost,” complains one businessman.
Another likely result is an increase in smuggling. Nigeria’s imports of cars have plummeted as a 70% tariff imposed by the previous government is phased in. Mysteriously, those to the tiny nearby countries of Benin and Togo have soared.
Mr Emefiele’s efforts to prop up the naira also look counterproductive. He has managed to keep it at about 199 to the dollar since March. In theory, imports of the 41 proscribed items aside, it remains fully convertible. But the central bank has imposed all sorts of restrictions on currency trading, dollar deposits and cashpoint withdrawals in foreign currencies. It justifies this by saying that speculators are distorting the market.


The result is that businesses are having a hard time getting hold of foreign exchange. Many have resorted to the black market, where the naira is sold at about 225 to the dollar (see chart). Others have simply cut imports and the jobs that rely on them. Isoken Ogiemwonyi, who runs a posh clothing shop in Lagos, has a new rule: “Anything imported, I can’t do.”







The new regulations are also contributing to foreign investors’ disenchantment with Nigeria. JPMorgan, an investment bank, is threatening to boot the country from its government-bond index if it does not deregulate currency trading by the end of the year. That would prompt many foreigners to sell, raising borrowing costs and putting the naira under more pressure. As it is, Samir Gadio of Standard Chartered, a bank, reckons that foreigners sold a net $3 billion-4 billion of Nigerian bonds in the last quarter of 2014. They now hold less than 10% of the outstanding stock, compared with 27% in 2013.


The central bank takes consolation in the fact that reserves have ticked up by a couple of billion dollars since May, though this may be attributed as much to stricter book-keeping under Nigeria’s new president as to Mr Emefiele’s efforts. Earlier this month Kazakhstan, another big oil exporter, unpegged its currency, prompting a mighty slide against the dollar. Mr Emefiele was unmoved.


Comments (7)