Has Oil Price Plunge Brought Forward Nigeria’s Day of Reckoning?

Imagine a petroleum-dependent economy, one further constrained by an unrealistic currency peg to a resurgent US dollar.

Not Saudi Arabia, which can put off its day of reckoning, cushioned by foreign exchange reserves of $640 billion. Down to its last $30 billion in reserves, oil-rich Nigeria may have run out of cards to play in its fight to maintain a fixed currency as the 18-month slide in crude oil prices gathers momentum.

Over the weekend, Nigeria’s central bank lifted some of its restrictions on foreign currency transactions, permitting commercial banks to accept foreign currency deposits, a practice halted last year. In turn, commercial banks have allowed customers to transfer foreign funds abroad.

The move came after the Nigeria’s currency, the naira, fell to more than 300 against the dollar in the parallel market, a far cry from the official rate of 197-199 to the US unit. The central bank did itself no favors in its quest to prevent a widening of the gap between the official and black market rate last week, when it halted direct sales of foreign currency to non-bank institutions, further restricting the circulation of dollars in a hard-currency starved economy.

Central Bank of Nigeria Governor Godwin Emefiele has been summoned to the country’s senate on Tuesday, to explain the reasons behind the weakness in the currency.

He may have other things on his mind. Inflation rose to an annual rate of 9.6% in December from 9.4% a month early, in part due to a jump in the price of fresh food, much of it imported, and paid for with freshly-devalued naira.

Inflation has exceeded the central bank’s target range of 6-9% for months, raising the prospect of a rate hike when the central bank’s monetary policy committee gathers next week. Higher rates couldn’t come at a worse time. Gross domestic product expanded by a year-on-year rate of 2.84% in the third quarter, which barely outpaces the country’s population growth. Growth topped 6% in the same period a year earlier.


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