The naira had its worst outing in 2016. In terms of its value against the U.S. dollar, it was Africa’s least performing currency in 2016. On one frenzied day in December, the naira traded at N502 to the dollar in the parallel market. It closed the year at N480 to the dollar.
Globally, it finished 2016 at the fourth position among laggard currencies. The Egyptian pound topped the laggards list with its spot returns dropping by 58.8 per cent. It was followed by the Suriname dollar with spot returns tumbling by 46.6 per cent while the Venezuelan bolívar lost 37 per cent of its spot value in the Bloomberg rating. The naira took the fourth position with its spot returns tumbling by 36.6 per cent.
The trouble of the naira is spurred by an odd combination of domestic and international factors. The drop in oil prices over the last two years is a major cause of the crisis. It was worsened by domestic security problems in the Niger Delta where gun men have been blowing up oil facilities and pipelines in protest against the federal government.
The militants have knocked off about 40 per cent of Nigeria’s oil production. In the first quarter of 2016, oil production dropped to 1.3 million barrels per day, as against the budget reference target of 2.2 million. Tumbling oil price and production figures have reduced Nigeria’s foreign exchange earnings by half thus depleting its foreign reserves and subjecting the naira to intense pressure from speculators.
However, the naira’s problem is largely a crisis of confidence on the country’s leadership. The performance of the naira is a sharp contrast with the country’s fundamentals.
The security situation in Nigeria has improved significantly. The Islamic fundamentalists prosecuting a Jihad against Nigeria in the north-east are still organizing suicide bombings and occasional ambush against the armed forces. However, their capacity to hold territory has been practically decimated. The camps of the internally displaced persons (IDPs) are still bustling, but there are strong indications that many more would soon return to their homes and resume their normal cattle rearing and crop farming that would contribute to gross domestic product and push the economy out of recession.
The militants in the Niger Delta have presented a tall and practically impossible list of political and economic demands to the federal government. The government is still calling for formal discussions that could end the attacks on oil facilities.
Even as the militants are still agitating, the attacks on oil facilities have drastically reduced. Last month oil production rose to 1.9 million barrels per day.
With a population of 170 million people, Nigeria has an alluringly huge market that investors covet. Besides, the political terrain has been very stable by African standards. For the first time in its 56-year history as an independent nation, Nigeria has been under civil rule for 16 years without military intervention. The first republic lasted a scant five years before the military rolled out the tanks to topple it. Military tanks crushed the second republic in less than five years of existence. What could have been the third republic ended up with the military grudgingly sharing power with civilians for about one year.
After 16 years of civil rule, the international community is getting used to Nigeria as a respectable member of the comity of democratic nations. That is a big plus for Nigeria’s fundamentals.
The problem of the naira is therefore a problem of lack of investor confidence in the rulers’ ability to fashion out policies that would get the economy out of recession. Investors are worried about the length of time it takes for government to take quality decisions in the face of economic emergency.
The federal government dithered over the plight of the naira for several months when it was obvious that the only way out of the tumbling value of the currency was to remove the artificial peg that kept its value above its purchasing power. When the decision was eventually taken grudgingly, seemingly irreparable damage had already been inflicted.
Government has exhibited similar indecision on its handling of Nigeria’s cash-guzzling refineries. It has been very reluctant to adapt to the refineries, the shareholding structure and management system that have made the Nigeria Liquefied Natural Gas (NLNG) a huge success. It has clung tenaciously to the grossly abused public ownership and management of the refineries which has drained lean foreign reserves through avoidable dependence on imported refined petroleum products.
The perception of the international community is that government lacks the capacity to handle economic emergencies. Until that perception changes, the assault on the naira would persist.
Brazil’s economy has been in recession for 30 months. However, the real, Brazil’s currency was second only to the Russian ruble in the 2016 global currency performance rating. It appreciated by 20.9 per cent while the ruble climbed by 21.3 per cent. The rise of the real was spurred by investors’ perception that the policies of Brazil’s new president were capable of getting the economy out of recession. The federal government must convince investors that it can make smart economic decisions.
After 16 years of civil rule, the international community is getting used to Nigeria as a respectable member of the comity of democratic nations
