- Oil Price, Forex Policy Hamper Economic Recovery
The country’s economy may struggle to rebound from its worst slump in 25 years unless President Muhammadu Buhari ends the Niger Delta militancy and review the nation’s foreign exchange policy that has blocked investment, economic and financial experts have said.
The experts said a more favourable oil and foreign-currency environment could help the economy, Bloomberg reported.
The International Monetary Fund has estimated the nation’s Gross Domestic Product will contract by 1.5 percent for 2016 when the last quarter data is released soon.
“It’s oil prices and production from the delta that will determine growth,” the Chief Executive Officer of Time Economics Limited, Ogho Okiti, said.
“When monetary authorities floated the naira, they expected fiscal policies that attract investment and boost activity. But that didn’t happen, and as a result no one has confidence in the float,” Okito added.
The CBN, battling inflation at an 11-year high, has rebuffed the Ministry of Finance calls to cut record-high interest rates to boost the economy and has pledged to continue measures to manage the currency.
While the central bank scrapped a naira peg of 197 to 199 to the dollar in June, the CBN has intervened to hold the currency at around 315 since August.
That compares with a rate on the parallel market of almost 500 to the dollar. The central bank has also blocked importers of selected items from the interbank foreign-currency market.
“We expect the economy to recover, in part because oil-price falls and oil-production declines are behind us,” the Chief Economist at Exotix Partners LLP in London, Stuart Culverhouse, said.
“The extent of recovery will depend on normalizing the FX situation which is still a constraint on the economy.”
A shortage of dollars needed to repatriate profits forced some airlines to reduce flights to Nigerian destinations, while in manufacturing, investors including Africa’s richest man, Aliko Dangote, have held back expanding some of their businesses.
“There are no imminent plans for further FX liberalisation,” the Head of Africa Macro Research at Standard Chartered Plc in London, Razia Khan, said.
“FX will continue to be rationed, with key sectors being prioritised,” he stated.
Fitch Ratings downgraded the outlook on Nigeria’s credit assessment to negative because of concerns that foreign currency shortages will constrain the non-oil economy. Fitch puts the nation’s debt is rated B+, four steps below investment grade.
“Access to foreign exchange will remain severely restricted until the Central Bank of Nigeria can establish the credibility of the interbank foreign-exchange market and bring down the spread between the official rate and the parallel market rates,” Fitch said in a statement on Wednesday.
The Federal Government should use policies that attract private capital because increasing public spending alone won’t be sufficient to revive the economy, a senior associate for investment banking at Afrinvest West Africa, Ayodeji Ebo, said.
“Last year, because of the challenge of meeting revenue targets, capital expenditure suffered,” he said. “I see the same pattern this year,” he added.