The Nigerian economy is being challenged by crashing oil prices despite the central bank’s best efforts to stem outflows. So what’s happened, what measures have been taken and why does it all matter, in Nigeria and beyond? Here’s the short answer.
Q: How dependent is Nigeria’s economy on oil?
A: Africa’s top economy and crude producer has grown 7% a year for the past decade. As retail and telecommunications companies have taken off, the oil industry has shrunk to a more balanced 14% of economic activity. Nonetheless, oil and natural gas still make up almost all of Nigeria’s exports and around 80% of government revenue, according to the International Monetary Fund. Brent crude has slipped more than 45% year-to-date and that is seriously damaging the value of Nigerian exports and assets.
Q: How have markets fared so far?
A: The most obvious sign of the pressure that the slipping oil price is exerting on the Nigerian economy, is in currency markets. The naira has fallen more than 17% so far this year against the dollar as investors have pulled out, and on Thursday it hit yet another record low of 187.40 against the buck. In December alone, the naira has depreciated by 5%.
Equity markets are feeling the heat too. The Nigerian all-share index is 15% lower this month and down almost 30% so far this year. Nigeria has three dollar bonds outstanding which have all dropped in recent weeks too. Nigeria has revised its budget on the assumption that oil will hover around $65 a barrel, which is still higher than current prices. The country’s economy is now expected to grow 5.5% this year, rather than the 6.4% previously forecast.
“We fear that the currency’s sharp depreciation is likely to impact negatively on inflation as Nigeria is a very import-intensive market,” Barclays economists write in a note.
Q: What measures have been taken to limit damage?
A: The Nigerian central bank has implemented a number of measures in recent weeks to try to control the situation. In early November, the bank barred importers of goods, including electronics, generators and telecommunications equipment, from procuring dollars at its foreign-exchange auctions. Later in the month, it raised its key interest rate by one percentage point to a record high of 13%. Since then, the central bank has also intervened several times, according to traders, by selling dollar reserves to prop up the naira.
This week, it banned dealers from depositing currency-trading funds overnight, preventing traders from placing bets for or against a single currency at the close of a trading session. So far though, all of these measures appear to have had little impact though. The naira remains stubbornly pinned close to a record low against the dollar and economists have said that until the price of oil drastically rises, Nigeria will suffer.
Q: How important is the Nigerian economy to Africa?
A: In a word: very. In April this year, and as a result of efforts to measure one of the world’s biggest informal markets, the country’s National Bureau of Statistics said that Nigeria’s nominal gross domestic product was $510 billion in 2013, which was 89% larger than previously estimated, and $190 billion more than South Africa‘s slow-growing economy.
Q: How did it rise to the top?
A: Nigeria’s rise is primarily a triumph of demographics. Its population will be seven times as large as South Africa’s by 2050, the U.N. projects. That trajectory is drawing investment and emboldening businesses. Nissan Motor Co., General Electric Co. and Procter & Gamble are just some of the multinationals that have invested in Nigeria of late. Last month, Carlyle Group LP, a private-equity firm, bought a $147 million minority stake in Nigeria’s Diamond Bank PLC, betting that a new mobile banking service will help rapidly boost the lender’s customers and profits. Separately, private-equity firms are considering bids for drinks company Chi, a person familiar with the company said in November.
Source: WSJ Blogs – WSJ.