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Nigeria Must Rethink Forex Policy to Spur Investment

There is need for Nigeria to seriously rethink her Forex policy to spur investment and quicker economic recovery. At the same time, the country recorded growth of only 3.96% y/y in Q1, 2015, down from 5.9% in Q4-2014, according to Razia Khan, Economist at Standard Chartered Bank, London.

She said Nigeria’s oil sector contracted by 8% y/y in Q1, following growth of 1% in the previous quarter. “Decelerating growth was seen across most sectors in Q1, with the exception of crop production. Q2 growth may be slower still, reflecting a slowdown in activity around the elections, and the transition to a new government.”

She said the severity of fuel shortages in May, culminating in a shortfall in imported diesel for generators, had a more pronounced impact on the services sector than is typically the case, just as growing queue for foreign exchange, as Nigeria’s ‘order matching’ FX system fails to meet all demand, may result in a further delay to corporate investment plans, potentially postponing recovery.

Khan also projects slow growth in the first half of 2015, with some recovery in the second half of the year. “However, downside risks
to our full-year forecast of 4.5% GDP growth still predominate. We are constructive on the outlook for oil in H2-2015. We expect oil prices to rebound to c.USD 80-90/bbl. Higher oil earnings should provide some boost to activity. “

She advised that Nigeria’s changing economic fundamentals call for a rethink of foreign excahnge policy, in order to better absorb external shocks. “We see Nigeria’s current account surplus moving to a deficit, both in 2015 and in the years ahead. The pace of accumulation of new FX reserves will not easily support a fixed exchange rate system.

With a fixed exchange rate, FX reserves rather than the NGN bear the brunt of any external shock, hurting Nigeria’s creditworthiness, and potentially raising the cost of any external borrowing. Near-term, constrained FX availability also exerts a cost on the real economy, adding to uncertainty and delaying investment activity.

The risk is that the longer it takes to re-open the FX market, the greater.”

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