Two seemingly unrelated reports, last week, by Bloomberg painted a rather gloomy picture of the outlook for the Nigerian economy. The first one was on how foreign investment in the Kenyan stock exchange last month had surpassed that in the Nigerian Stock Exchange for the first time ever. According to the report, “The value of shares traded on Nigeria’s exchange fell to $139 million, near the lowest since Bloomberg began compiling such data in 2009, as foreign investors shunned an economy battered by militant attacks on oil facilities and shortages of foreign-exchange. In Kenya, with an economy an eighth the size of Nigeria’s but set to grow almost 6 percent this year, the value rose 4.2 percent from August to $152 million.”
On its own, this is very disturbing news. After all, Kenya, a much smaller place has got part of its economy right enough to be the biggest supplier of cut flowers to the European Union. Now, it may also be stealing our foreign financing lunch. Easy to proceed from this premises to interrogating the much broader concern about what the Kenyans might be doing right to earn these successes that we may not be into.
At the very least, only in July did we budge on the management of the exchange rate, finally letting in some flexibility into the interbank foreign exchange market, after squandering a national fortune defending the peg that was in place before. Incidentally, much of the protest over the peg had come from non-resident interests (the IMF, and foreign fund managers) who had argued that a fixed exchange rate peg (and the multiple exchange rates accompanying it) were not conducive to attracting foreign investment into the economy. Portfolio money, for instance would want some clarity both about the rates at which they come in (the interbank market), and the likely rates at which they could repatriate their funds (the parallel market).
A fixed exchange rate arrangement, at the whim and caprice of the Central Bank of Nigeria (CBN), clearly fails this latter test.
Why then, three months after a transition to a flexible exchange rate regime at the interbank market, are such investors all headed Kenya’s way?
The second Bloomberg report provides some insight into this conundrum. The problem, according to the report apparently, is that the “float is anything but free…with the central bank holding the naira in a tight range around 315 per dollar since the beginning of August.” By July this year, it was clear that the CBN did not have enough dollars in its kitty to support its US$1/N197-199 peg. The transition to the market, which occurred on the back of this acknowledgement, then, was supposed to clear demand and supply at the “optimal” rate. One other argument was that market-determined rates were necessary to wipe out the arbitrage opportunity between the “official” and “parallel” markets — in essence, eliminate the multiple exchange rate regime that was sending conflicting signals to the markets.
Post-market, though, the central bank’s sense of an appropriate price for the local currency may be serving to dampen the signals needed to keep the market properly supplied. Two things are therefore happening according to the second Bloomberg report: a shortage of dollars continues to cripple Nigeria’s economy, driving black-market naira rates to a record; and “naira forwards have soared to records, suggesting foreign investors see another devaluation coming. Contracts maturing in six months trade at 384 per dollar, their highest-ever level, while those due in a year have climbed to 422 from 325 since the end of June.”
Disturbing all of these clearly are. Without the right architecture, the naira will continue to tread water. However, re-purposing macroeconomic policy is possible only when those responsible have a fully functioning understanding of the problems the country confronts.
This is where one other worry looms large: How well do our current leaders appreciate the crisis the economy is in?
Both Bloomberg reports came out in the week that President Buhari in a nation-wide address reported that “foreign investors are falling over themselves to invest in Nigeria”. Kenya? Maybe. But on current evidence, definitely not Nigeria. What else is the president unaware of?