Nigeria risks losing gains from Tinubu’s policy shift: Capital Economics
The gains from Nigeria’s recent policy shift after President Bola Tinubu took office risk evaporating, Capital Economics has said.
The policy shift has stalled in recent weeks as officials have responded to a growing political backlash by reverting to the interventionist tendencies of the Buhari administration, the London-based research firm said on Thursday.
“The result is that the naira has plunged on the parallel market and costly fuel subsidies have returned. All hope is not lost,” the Deputy Chief Emerging Markets Economist, Jason Tuvey, said. “But officials will need to move quickly to reassure investors that the orthodox shift remains on track.”
He said as a first step, the new Governor of the Central Bank of Nigeria, Olayemi Cardoso, could do no better than delivering a large interest rate hike.
Tinubu, who took the helm of Africa’s biggest economy on May 29, announced the removal of costly fuel subsidies in his inaugural speech. Shortly after, the central bank devalued the naira by 40 percent against the dollar and unified its multiple exchange rates.
The moves, coming after “eight years of sclerotic and unorthodox policymaking under President Buhari, created much fervour among analysts and investors”, and have resulted in some near-term economic pain, Tuvey said.
“We warned that this could prompt a backlash and this appears to be materialising,” he added.
Earlier this week, the country’s two largest unions called an indefinite strike from October 3 over the cost of living.
The naira has fallen to 1,000/$ on the unofficial market, compared with an official rate of 780/$. “That’s come despite higher oil prices, with Bonny crude approaching $100pb, which should support an improvement in Nigeria’s balance of payments position,” Tuvey said.
“Policymakers have pinned the weakness of the naira on the parallel market on a lack of dollar liquidity. But that is a situation caused by their inclination to prevent further falls in the naira as opposed to allowing the market to freely determine the exchange rate,” he said.
He said in order to prop up the naira, officials have had to continue to ration foreign currency to preserve FX reserves, pushing demand towards the parallel market.
“Alongside intervening to prop up the naira, the potential fiscal gains from the policy shift are also at risk of being squandered,” Tuvey said. “Perhaps most worryingly, the fuel subsidy has returned.”
