Nigeria’s Rate Pledge Tested as Naira Tumbles With Oil
The naira’s plunge to an all-time low is threatening Nigerian central bank Governor Godwin Emefiele’s pledge to avoid raising interest rates before presidential elections in February.
“If the central bank is to prevent speculation that the naira will continue to fall, putting further upward pressure on prices, it may need to raise interest rates sooner rather than later,” Jack Allen, an assistant economist at Capital Economics, said in an e-mailed note yesterday. “The central bank may face political pressure not to raise rates. The threat of a currency crisis is likely to trump these concerns.”
The Central Bank of Nigeria stepped in today, selling dollars to the market to support the naira, Deputy Governor Sarah Alade said by phone. The currency gained 2.5 percent to 165.80 by 1:08 p.m. in Lagos, the commercial capital, reversing an earlier decline to a record low. The bank had recently slowed its market interventions after spending billions since mid-September to avoid moving the naira peg for the first time since 2011. The bank sold $200 million of foreign exchange at an auction on Nov. 5, the least since Feb. 12.
“They’re not willing to feed dollars when they know the broader market is against them,” Gareth Brickman, an analyst at ETM Analytics, said by phone from Johannesburg yesterday. “Drawing a line against a market that smells blood in the water can lead to doom pretty quickly.”
Africa’s largest economy banned paying for imported goods such as electronics, generators and telecommunications equipment with foreign exchange bought at bi-weekly auctions, according to a circular posted on the Abuja-based regulator’s website yesterday.
Nigeria, which relies on oil for 80 percent of government revenue, is facing lower export earnings after the average crude price among members of the Organization of Petroleum Exporting Countries dropped below $80 for the first time in four years. Reduced intervention boosts the chance of a 50-basis point increase in interest rates to 12.5 percent at the central bank’s Nov. 24-25 meeting, according to Capital Economics.
The bank offers the naira at 155 per dollar, plus or minus 3 percent, at twice-weekly auctions. “The bank is making efforts to defend the currency,” Ibrahim Mu’azu, a spokesman for the central bank, said by phone from Abuja. “We don’t want any crash. There is no decision to devalue the currency.”
“Either the CBN keeps intervening in the market to support the naira, in addition to the twice weekly auctions, or the naira is devalued to accommodate the current reality,” Kunle Ezun, a strategist in Lagos at Ecobank Transnational Inc., said in an e-mailed response to questions yesterday.
Emefiele, 53, took control of the central bank in June with a mandate to keep inflation, which has stayed above 8 percent since May, within a 6 percent to 9 percent target band. While he has said he favors lowering borrowing costs, the threat of rising government spending before the elections may spur price increases.
Emefiele’s predecessor, Lamido Sanusi, was suspended by President Goodluck Jonathan in February after Sanusi alleged the state-owned Nigerian National Petroleum Corp. had retained almost $20 billion in revenue that was due to the government. The NNPC denied the allegations. Sanusi originally told Jonathan last year that almost $50 billion wasn’t accounted for.
The naira’s decline may boost the cost of importing everything from fuel to food, threatening support forJonathan, who’s already under pressure for failing to stem deadly attacks by Islamist militants.
Violence in the northeast of the country, which imports 70 percent of its fuel needs due to inadequate refining capacity, is hurting agriculture and could trigger demand for imported food to fill the void left by local farmers.
“We’re seeing more foreign-exchange flexibility,” Samir Gadio, head of Africa strategy at Standard Chartered Plc in London, said in e-mailed comments. “Perhaps they do not want to burn FX reserves unnecessarily. It’s a risky strategy.”
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- November 7, 2014
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