Phyllis Papadavid
Overseas Development Institute
The Nigerian economy is in recession,
after having registered two quarters of negative growth in mid-2016. Its
foreign exchange reserves have declined from $37.3 billion to $25 billion
between June 2014 and September 2016 alone, and its current account is now in
deficit, with the IMF expecting it to be 2.8% of GDP in 2016 – its lowest level
since 1998. The slump in oil prices has been a key driver as petroleum exports
represent 90% of Nigeria’s total export revenue. This economic predicament is
exacerbated by policy uncertainty regarding liberalisation of the naira
exchange rate.
President Buhari recently stated that he
anticipates an economic recovery. Yet the composition of the Nigerian economy
has left Nigeria with a growing oil-related external imbalance, suggesting that
prospects for growth, and employment, will remain poor. The Central Bank of
Nigeria (CBN) would like to foster greater exchange rate flexibility to
facilitate a new phase of growth and development. This would enable a
diversified growth path away from the oil sector following Nigeria’s slow
economic transformation.
Meanwhile, speculative inflows into
Nigeria will continue to exert a downward pressure on the currency unless there
is a strategy to fully liberalise the naira to improve Nigeria’s external
position and to rebuild foreign exchange reserves. Following the flexible naira
exchange rate regime announcement, policy-makers should now focus on freely
floating. This is essential if the new currency regime is to gain credibility,
catalyse confidence and complement any growth transition to the non-oil
manufacturing sectors.
Download the briefing paper at the link
below:
https://www.odi.org/publications/10559-nigerias-naira-moving-flexible-exchange-rate
https://www.odi.org/publications/10559-nigerias-naira-moving-flexible-exchange-rate
