Naira unpegged: Local and foreign businesspeople weigh in

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Last week the governor of the Central Bank of Nigeria (CBN), Godwin Emefiele, announced plans to adopt a market-driven exchange rate system – after over a year of refusing to devalue the local currency. The policy was implemented on Monday, and the naira has since fallen around 40%.

The naira was pegged at just below 200 to the US dollar since March 2015. But foreign reserves soon dwindled as the country’s export revenue shrunk on the back of collapsed oil prices. In January the CBN halted dollar sales to foreign operators and the naira plummeted to around 350 to the dollar on the black market.

In an emailed statement from South African packaging company Nampak, the group’s investor relations manager, Zanele Salman, said the CBN’s move to adopt a flexible exchange rate system “was the right decision for the country and the economy”.

Nampak revealed in its half-year results that it had R1.5bn (over US$100m) in cash tied up in Nigeria and Angola at the end of March and was unable to convert this into US dollars as a result of foreign currency shortages. Airlines such as Spanish carrier Iberia and the US’s United Airlines also reported troubles converting profits from ticket sales in naira into dollars and decided to cease flights to Nigeria.

Many economists applauded the decision to de-peg the naira, including rating agency Moody’s which stated: “A functioning flexible exchange rate will reduce dollar liquidity shortages and associated risks of banks failing to meet their dollar liabilities when due or requiring the Central Bank of Nigeria to impose capital controls.”

A relief to many businesses

According to Ecobank’s head of economic research, Gaimin Nonyane, the exchange rate reforms should have been made sooner and will come as a relief to many local and foreign businesses.

“Firms have been struggling to buy hard currency and this will help to ease that pressure and provide more foreign exchange liquidity for businesses. So we are likely to see resumption in trading activity and possibly less of a contraction in Q2 and Q3 this year, than there was in Q1,” says Nonyane.

“A move towards more flexibility in the market means investors will be more attracted to the economy. There is the removal of capital controls to some extent, although there is still the ban on importers of 41 goods and services. So there is still some restriction and some investors will be cautiously optimistic. But the mere fact that they have removed the peg is the step in the right direction.”

Martyn Davies, Deloitte’s managing director of emerging markets and Africa, agrees. “I think we will see a gradual improvement in confidence, especially from foreign companies.”

However, Mark Hodgson, industrial and corporate governance analyst at Avior Capital Markets, notes a degree of uncertainty will continue.

“It’s a good move for the country in general… Investors who are either looking to come in or put in additional capital will [now] feel like they are doing it at a more realistic rate than was previously the case. But it probably makes people worried that [the naira] might be pegged again in the future – that is possibly the concern,” he adds.

“There should be an amount of investment coming in but there should also be a lot of pent-up money trying to get out… So you have to wait a good three months to really assess what the longer-term ramifications will be.”

Short term struggles

Nevertheless, many are bracing themselves for a tough few months as economists predict inflationary struggles.

“In the short term it will be painful for everyone because the cost of everything is going to go up,” highlights Nonyane.

“For importers it means they will have to put in more naira in order to purchase goods and services abroad. And once those goods return to Nigeria, they are going to inflate the prices and that price increase is going to be transmitted to domestic prices so there will be a rise in inflation in the short term in Nigeria. So everyone will definitely be affected.”

A weaker naira will also pose challenges to local entrepreneurs who transact in dollars. Tolu Roberts, co-founder of Nigerian digital advertising company, S&T Media, notes that while the CBN’s decision was the right move, it is having an adverse effect on his company’s bottom line. S&T Media imports digital advertising screens that are installed at petrol pumps in Lagos.

“Our products are currently made abroad and it’s going to cost us on average 40% more [to import] and I do not think our current clients are actually ready to pay more.”

Despite halting imports due to currency fluctuations, Roberts believes things will improve in the long term. “So we are hoping that vindicates some of our losses that we are currently experiencing,” he continues.

“We are going to go through quite a rough time because it is now sort of a free market and demand will determine what the dollar-to-naira ratio is. But I’m quite optimistic about the future.”