Nigerian economy on the ropes with a fully-fledged currency crisis

Crude oil was trading at well above $100 a barrel and countries like Nigeria, Venezuela, Saudi Arabia, Iraq and others were sitting pretty with large central bank reserves and a seemingly endless supply of greenbacks. The situation deteriorated rapidly as WTI crude oil producers gained momentum and started pumping out millions of barrels of crude oil per day. The rise of the US shale oil industry has been a boon and a bane for the global economy. Today, it is possible to pay around $1.70 a gallon or less at the pump, significantly down from over $3.50 per gallon a year ago.
As a consumer, the crude oil price rout is generally perceived as a positive development, but the deflationary effects are severe. We have already seen the shuttering of oil mines across the US, and much the same pattern is being seen in OPEC countries like Nigeria, Venezuela and others. The fact of the matter is that oil wells cannot maintain production at a profitable level at current prices, but they are willing to eat the losses in the hopes that ongoing revenue streams will at least service debts until such time as supply is cut. If and when that happens is a dubious proposition, since supply cuts will invariably raise prices which will then entice more producers back into oil production. With regards to Nigeria, it is the low price of Brent crude oil and the high costs involved in maintaining production that is crippling the industry.

Nigeria maintaining an artificial exchange rate

The latest economic data from the Nigerian Central Bank indicates that just $28 billion in forex reserves are available. The Nigerians have been selling USD in the hopes of strengthening their local currency, the Nigerian Naira (NGN). Presently, the central bank has two exchange rates – the official rate which is pegged at 197-199 to the US dollar and the unofficial rate which hovers around 300 NGN to the US dollar. Owing to the fact that the price of crude oil has plunged by 40% since the time that Nigeria adopted a fixed trading range for its currency with the USD, problems are coming to Nigeria. There are already multiple warning signs that the economy is not faring well under current conditions. Inflation is soaring, interest rates are high, employment is down, and job prospects are slow in coming.
Nigerians do not believe that the current official exchange rate has any value, and neither do foreigners who are withdrawing their investments from the country at a rate of knots. The current dissatisfaction with the exchange rates in Nigeria has given rise to shadow dollars. This market is effectively a black market for purchasing USD at a premium. This premium in Nigeria stands at approximately 70% above the current trading rate. According to the American Chamber of Commerce, you would now be paying approximately 337 NGN per US dollar. The official exchange rate is significantly less than that, at 198.97963. This means that the Nigerian Central Bank is artificially maintaining an exchange rate that is perceived as highly overvalued, according to foreign investors and locals alike. Further, analysts expect the Nigerian currency to depreciate by an additional 30% before the year is over, bringing the officially sanctioned exchange rate within range of the black market price level.
Incidentally, other countries that have premiums on purchasing US dollars over and above the official rate include Tajikistan at 4%, Egypt at 12%, Uzbekistan at 110% and Angola at 136%.

Important economic metrics in Nigeria

The Nigerian economy is growing at a rate of 9.19%, but it has an unemployment rate of 9.9%, and an inflation rate of 9.6%. The current interest-rate has been lowered to 11% from 13% back in November 2015 in an attempt to stimulate economic activity in the face of a global slowdown. The government debt to gross domestic product ratio is 10.5%. This populous African country of 179 million people has a food inflation rate of 10.6%, an interbank rate of 9.38%, and a lending rate of 16.96%. Nigeria also has 21.37 tonnes of gold reserves and FDI (foreign direct investment) totaling $1.214 billion. Some of the troubling metrics include the manufacturing production rate of -0.3% and industrial production rate of -6.6%. There is also tremendous bearish sentiment when it comes to the manufacturing PMI and the services PMI at 47.2 and 46.9, respectively.
Nigeria recently took a leaf out of China’s book and decided to implement circuit breakers in the NSE (Nigerian Stock Exchange). However, the Nigerian stock exchange has been one of the poorer performing bourses in the world with a year-to-date decline of -13.80%, and a 1-year return of -6.77% . The bourse’s 52-week trading range on the low side is 22,330.96 and on the high side is 35,843.39. In this index comprising 178 members, 11 members are up, 26 members are down and the balance is neutral. In the event of a 5% decline in prices, a 30 minute trading stop will be implemented. If there are 2x 5% declines in the day, all trading will cease until the next day.
The Chinese abandoned this policy, however, as they saw it as a way to accelerate selloffs by playing to investor and trader fears. Analysts are deeply concerned that Nigeria would attempt to mimic a failed policy that the Chinese themselves have abandoned. According to the latest financial charts, the Nigerian Naira has weakened substantially against the USD since 2015 with the bureau de change rate rising from approximately 180 to the USD to over 300. The interbank FX market rate has remained steady at 197-199. However, these dual rates which are designed to stabilise the currency are being hampered by runaway inflation, rising unemployment, plunging crude oil revenues and a loss of foreign investor confidence.