Nigeria's Devaluation Dilemma: Will Nigeria's President Muhammadu Buhari Have to Devalue the Currency as Africa's Largest Economy Continues to Struggle with the Falling Oil Price?

By Saigal, Kanika | African Business, March 2016 | Go to article overview

Nigeria's Devaluation Dilemma: Will Nigeria's President Muhammadu Buhari Have to Devalue the Currency as Africa's Largest Economy Continues to Struggle with the Falling Oil Price?


Saigal, Kanika, African Business


On a hot day in the centre of Lagos, Nigeria's capital, customers huddling around a small kiosk notice that prices of cold drinks and ice cream--a welcome treat in the midday heat--have been increasing over the last year and a half. In some cases, prices are so high that these small luxuries are slowly slipping out of reach.

The oil price is to blame. Since Muhammadu Buhari won Nigeria's tightly contested presidential election in March 2015, foreign exchange has become increasingly hard to come by as the global price of oil continues to a plummet. In just 18 months, the oil price has fallen from highs of over $100 to just $30 a barrel, dollars have become scarce and import prices have soared.

At one end of the scale, locals find it difficult to get their hands on luxury goods such as ice cream and toothpaste. At the other, some of Nigeria's states are rumoured to be technically bankrupt, struggling to pay wages, tackle unemployment and maintain essential social services while international investment dries up. At first glance, Buhari has inherited a Nigeria on the verge of a catastrophe.

Nigeria's coffers--heavily reliant on oil sales as one of Africa's largest producers of crude--are suffering. Government revenue has been slashed by two thirds, with foreign exchange reserves falling to just under $28bn in March 2016 from $31bn in September 2015.

Dollar scarcity has created a burgeoning black market. While official exchange rates pin the naira at N199 to the dollar, black market rates can now fetch anything north of N350. Indeed, those who can access official markets then sell on the black market have made a pretty penny for themselves.

The staggering gap between official and nonofficial exchange rates has more or less halted capital market activity. "Why would you invest in Nigeria at N200 when your cash is worth N300 on the black market?" says Yinka Odeleye, executive director, Union Capital Markets, a boutique investment firm based in Nigeria. "International investors will wait on the sidelines as opposed to investing when the currency is being kept at such undervalued levels. For now, international capital markets are more or less closed to Nigerian companies."

Analysts and bankers alike believe that a devaluation of the currency is one unavoidable policy change Buhari will have to oversee--one of the last ways in which the government can ease mounting pressure on the economy, bring much-needed investment flows back into the country and encourage growth.

"It's tied in with Buhari's plan to target corruption. If the currency was devalued now, they may be closer to balancing the budget but with all the loopholes and leakages still in place, even more money could fall into corrupt hands," says Odeleye. "If this were to happen, part of Buhari's legitimacy, which rests on his fight against corruption, could be at risk. …

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