Market News

What's gone wrong with Nigeria's economic reforms? - REUTERS

OCTOBER 02, 2023

STORY: After taking office in May, Nigerian President Bola Tinubu enacted a lightning-fast reform push.

Hopes were high of a business-friendly antidote to mounting troubles in Africa's biggest economy.

But fast forward more than 100 days and key planks of Tinubu's economic overhaul are coming loose.

During his inauguration, Tinubu ended forex restrictions and scrapped a popular but costly fuel subsidy.

Last week, however, the naira currency hit a record low of 1,000 to the dollar on the black market - widening the gap with the official rate.

Meanwhile petrol prices haven't budged since July - despite a more than 30% rise in oil prices.

Nigeria has, for years, tightly controlled the official naira rate.

But providing dollars at an artificially low rate led to a yawning gap between official and black market rates.

That left businesses unable to access dollars.

Tinubu let the naira weaken.

That saw it briefly converge with the black market and prompted assurances from Tinubu that investors could take out their money.

But David Omojomolo, Africa economist at research form Capital Economics, says momentum now seems to be "almost in reverse".

"I think there was an initial period of kind of optimism as the naira and black market rates kind of converged with one another, and then since around July they’ve widened."

The gap between the official and black market rates has widened to nearly 30%.

Sources say it's virtually impossible to get dollars from the central bank on an ad hoc basis.

And for entrepreneurs like fabric importer Kassandra Obi, forex shifts are cutting into her profits.

She says the naira is now over 1,000 to the dollar and was 970 the week before.

"I cannot pay 970 naira. Meaning the goods will be very expensive and we are going to slash our profits…the little profit we are making. Okay let me wait till when the dollar will reduce to maybe 800 naira, without knowing that the dollar is still going to increase again, like as the day goes by, it keeps increasing."

Meanwhile investors are being put off deploying their money in Nigeria.

One major factor is a nearly $7 billion backlog in foreign exchange demand.

Foreign airlines alone have $783 million in ticket sales trapped in the country, the International Air Transport Association said.

The tattered finances left by the previous administration have not helped.

JPMorgan calculated that net FX reserves stood at $3.7 billion at the end of 2022 - "significantly lower" than previous estimates.

And the dollar crunch is being exacerbated by a delay in scrapping fuel subsidies.

Though it's Africa's largest oil exporter, a lack of refining capacity means Nigeria imports nearly all its fuel.

And that's expensive - subsidies cost 2% of GDP last year, according to Fitch.

But amid rising anger and industrial action over the escalating cost of living - analysts say Tinubu lacks the social capital to push harder.

Now some fear that, despite early promise, Tinubu will be unable to wean Nigeria off the costly policies that have stymied investment and economic growth.


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