…as investors watch Nigeria’s “managed float”
The Egyptian government’s decision to float its currency has already started yielding positive outcomes in the economy, even though inflation spiked.
Even though Nigeria’s central bank has earned a pat on the back after it neatly squashed speculative attacks on the naira, which has led to a 20 percent appreciation in the black market, it must now consolidate the gains and take a cue from Egypt, analysts say. This will ensure that the bank sustains the current gains made.
Egypt floated its currency (EGP) last November and the result has been about $9 billion in foreign portfolio investment and developmental loans. Last Sunday, Deputy Finance Minister, Ahmed Kojak, said the country attracted an additional $3.1 billion of foreign investment in domestic debt instruments since the float. This means that Egypt has attracted a cumulative US$12 billion in foreign direct and portfolio investments since it floated its currency in November 2016.
The gap between the official and unofficial value of the Egyptian pound has now converged at 18 EGP to the US dollar since the float, compared to a 10 EGP gap prior.
In Nigeria, despite the recent CBN intervention, which jolted the market, the gap is still as high as N79 to the US$ ,depending on which of the official rates is used.
Early in November, Egypt and Nigeria were in the same situation, crying out for dollars to revive their sinking economies and trying to curb rampant currency trading in the black market.
While Egypt has achieved both, Nigeria is still being bogged down by a reluctance to float the naira.
The CBN may have dealt with speculative activities, but they need to now focus on achieving a convergence of the multiple rates in the different markets, says Taiwo Oyedele, a partner and head of tax at consulting firm, Price Waterhouse Coopers (PWC).
“The recent black market naira rally is positive, but Nigeria must now bite the bullet by floating the currency, to ensure that the market is able to provide all it needs with little intervention from the CBN,” said Oyedele.
“An end must be put to discretionary allocation, while the foreign exchange ban on 41 items must be lifted, even as we get to a point where foreign inflows outpace outflows,” Oyedele added.
Foreign outflows outpaced inflows on the Nigerian Stock Exchange (NSE) in the month of February, as investors sold off N18.44 billion worth of stocks, compared to an inflow of N16.10 billion, for the first time in 2017, according to data from the NSE.
Foreign investors remain cautious of the exchange rate and are taking a cue from those that still have their funds trapped within the country, Tajudeen Ibrahim, head of research at Chapel Hill Denham observes.
“The CBN has been attending to the retail end of the market, but from our estimates, there is still a $3-5 billion backlog for visible items,” Ibrahim said.
Ibrahim expects more investors to exit the country, until the naira is open to market forces and investor confidence returns.
Egypt’s tactic was to ditch a currency peg, leaving its pound open to market forces. The move helped secure a $12 billion International Monetary Fund loan for Africa’s third-biggest economy.
Christine Lagarde, Managing Director praised the government for restoring “economic sanity.” Egypt is still short of dollars, but the situation is changing, and investors are gradually returning.
Nigeria, in contrast, is not letting the naira trade at its market value, insisting that it is the only way to protect the poor from a further surge in inflation, which cooled for the first time in 15 months in February, on base effects.
On the back of slowing inflation, Ibrahim of Chapel Hill Denham, expects that the CBN may succumb to floating the naira in the second quarter.
A naira float is something officials have on the table, as highlighted in the new Economic Recovery and Growth Plan (EGRP), but it is the time line that remains unclear.
As elections draw close, some analysts are doubtful that officials can follow through on the float, which is certain to spark inflation and worsen the hardship on locals.
“Nigerians are forgiving, if we float the naira, and the gains begin to show up like they are already doing in Egypt, the administration will attract more kudos than knocks,” said Oyedele of PWC.
LOLADE AKINMURELE
