Nigeria's pledge to float currency is a false start

In late May the Central Bank of Nigeria Governor Godwin Emefiele told market participants that the bank was preparing to remove the peg it had against the US dollar because it could no longer support its currency, the Naira, after haemorrhaging foreign currency reserves due to the slump in oil prices that created a vacuum between the funding and disbursements in its trading account.

No date was given at the time however Emefiele said it was "a matter of days" before the country would introduce a flexible exchange rate policy with authorities at work to make it happen. This was in sharp contrast to what Nigerian President Muhammadu Buhari had envisioned being a fierce defender of the peg in an effort to shield his citizens from abnormally high inflation.

It now turns out that the Nigerian finance ministry is evading the implementation of such measures by stalling investors and refusing to give a set date to when they can expect the new policy to take effect.

What looked to be a positive reform in acknowledging the faults of the current system and proposing an overhaul of the central mechanism that allows foreign trade to take place has effectively shown the differing views between the CBN and the Nigerian government.

Firstly investors detest political squabbling, putting it down to the creation of uncertainty in the pathway moving forward with crucial policy changes needed to revitalise the economy. If an uncertain environment exists investors opt to sit on the sidelines.

Added to this the Nigerian government's bureaucratic processes, which must be said isn't isolated to this country only, strangles the progression of its economy and the need to realise that it cannot be a fixture when attempting to attract investors to its shores becomes more evident when an outcome such as this begins to take shape.

Lastly it highlights the government's underestimation of the enormity of the task which doesn't bode well for confidence in their ability to manage the domestic financial system, generating further risks that require more return to be poised to invest in the country, a situation that only gets compounded by the current economic downturn.  

#Nigeria tells investors it'll make a #naira announcement within weeks. https://t.co/WCsodYXnOd @LyubovEmWorld pic.twitter.com/B8liDMMR2o

— Paul Wallace (@PaulWallace123) June 8, 2016

Nigeria plans to drop its currency peg

I wrote a piece last week detailing the political risk that's being created as a result of the decline in oil prices with specific focus on Nigeria and Venezuela as good examples. I stated that both these countries had been over reliant on oil to generate fiscal revenues resulting in a disastrous outcome that's currently plaguing their respective economies.

Of Nigeria, I said that the lack of sufficient oil revenues was placing a cash drain on the finance ministry that would cripple the Nigerian government's efforts to ward off the insurgency of terrorist group Boko Haram who've sown a reign of horror throughout the West African country.

New information shows that the Nigerian government and finance ministry are four months behind on announcing the annual budget prompting many to believe that the nation could be headed into an economic contraction which isn't far fetched if you weigh up the severity of the foreign currency reserve depletion as a result of foreign firms demand for dollars far outstripping supply causing an imbalance in the accounts of the Central Bank of Nigeria.

A peg pipped against the US Dollar has failed to restrain the Naira from depreciating away from the pegged level of 200 with the 12 month forward rate Naira-Dollar being quoted as much 50-60% weaker than the peg.

Calls to drop the peg have been met with resistance from newly incumbent president Muhammadu Buhari who believes that the harshness of inflation that would flow into the economy as a result of a sharp depreciation would likely unhinge all the good work done in building up a solid foundation for the country's economy. Most critics believe Buhari didn't have a clear grasp of the developments happening in the oil market and thus over leveraged his bets of a bounce materialising at much higher levels. Again strong evidence of the over reliance on oil to generate government revenue.

Nigerian recession is imminent, central bank governor says https://t.co/RjqryCAqJo

— Bloomberg Africa (@BBGAfrica) May 25, 2016

But in a twist of events Central Bank of Nigeria Governor Godwin Emefiele said the bank would be operating its foreign currency market based on a flexible system that would allow the free market to dictate equilibrium, hinting at reforms that would help the nation prosper in an easier motion.

The move came as much of a surprise as it did a shock for most who had expected some type of drastic measure to be implemented to prevent further economic calamity descending into the levels of despondency. Nevertheless the reaction from all quarters of its financial markets pointed to a favourably vote of confidence in the move.

Before we see any normality return into the fray, Nigeria will experience a much anticipated recession that could've been prevented had the government not acted quicker in removing the currency peg yet the long term benefits that would accrue from its existence far outweigh any short term discomfort founded on the back of a sudden adaption to a shock to the system.

The risk that once added additional return no longer resides in the investment equation making the flow of capital less hesitant to place its economically beneficial substance that'll find its way freely into the financial system and channel itself to where its needed most, breathing life back into a good story to tell.

In retreat for Buhari, Nigeria prepares to let naira weaken https://t.co/XOmlzzX178

— Bloomberg Africa (@BBGAfrica) May 25, 2016