Nigeria’s foray into economic orthodoxy cheers investors

Early moves by Nigeria’s new president to put the country on a more orthodox economic trajectory have been praised by investors who are hopeful that Africa’s most populous country has passed an important inflection point.

Bola Tinubu late on Friday suspended Godwin Emefiele, central bank governor since 2014, citing an “investigation and the planned reforms in the financial sector”. Emefiele, later detained by Nigeria’s intelligence agency, pursued a policy at the central bank of spending large amounts of the country’s foreign reserves to prop up the naira.

This followed the decision by Tinubu, who took office last month, to scrap the fuel subsidies that cost Nigeria more than $10bn last year. The IMF and the World Bank had long urged Abuja to end the subsidies and instead channel the money into health and education, but successive governments had shied away from doing so.

Analysts said Tinubu’s early weeks suggested a change of direction for Nigeria’s battered economy, which stagnated under his predecessor, Muhammadu Buhari.

“The markets are getting everything they hoped for from the change of president in Nigeria,” said Charlie Robertson, head of macro strategy at FIM Partners, an asset management firm.

Kevin Daly, investment director at EM specialist asset manager Abrdn, said talk of changes to Nigeria’s foreign exchange system had been “another trigger for a big rally in Nigerian bonds”.

Nigerian eurobonds maturing in 2051 were on Monday 3.8 per cent higher, at 73.8 cents in the dollar, the highest level since January.

“It’s been a long time since we had positive reform momentum in Nigeria and we’re seeing it now,” Daly said. But he said investors still had to be convinced of a lasting conversion to economic orthodoxy by Tinubu, who promised in his inaugural speech to keep interest rates low.

“We’ve seen how that played out in Turkey,” he said. “It’s important for him to understand that rates will have to go up to attract foreign investment into the local bond market, and you can’t start talking rates down until there’s a meaningful decline in inflation.” The annual rate of inflation was 22.22 per cent in April.

Razia Khan, chief economist for Africa and the Middle East at Standard Chartered Bank, said eliminating subsidies and removing Emefiele “signals in part” the promise of coming reforms to Nigeria’s foreign exchange markets. Tinubu said last month that monetary policy needed “thorough housecleaning” and that the system of multiple exchange rates introduced under Emefiele should be unified.

Allowing the naira to trade freely against the dollar to reflect its true value was rejected under Buhari, with the central bank using multiple “windows” to sell dollars cheaply to industries seen as essential to the economy. This provided an avenue for arbitrage as well-connected businesses bought dollars on the cheap from the bank and sold higher on the black market.

The central bank has held the main naira rate at about 460 to the dollar for most of this year, down from about 380 to the dollar before the pandemic. But dollars currently change hands on the parallel market at about 740 to the dollar. Dollar scarcity, also due to low oil production, has forced many businesses to source hard currency at the parallel rate.

Robertson said removing expensive subsidies and a potential convergence of forex rates would be “hugely important for Nigeria’s budget” and pushed back a default risk he said had been “seriously concerning” for at least a year. Folashodun Adebisi Shonubi, one of Emefiele’s deputies, has assumed the role of temporary central bank governor.

Despite investor support for policy and personnel changes at the central bank, there are concerns that Emefiele’s unceremonious removal threatened the institution’s independence. Nigeria’s president can only legally remove a central bank chief on the basis of a two-thirds majority in the country’s 109-member Senate.

In 2014, former president Goodluck Jonathan suspended central bank chief Lamido Sanusi for “financial recklessness” in a move widely seen as politically motivated after Sanusi alleged that $20bn had gone missing from the state oil company. He challenged his dismissal but a court declined to hear the case.

Cheta Nwanze, a partner at the Lagos-based consultancy SBM Intelligence, said the manner of Emefiele’s suspension was “fraught with illegality”.

“The central bank act doesn’t quite give the president the powers he has just exercised,” he said. “This was a bad precedent that was set when Emefiele’s predecessor was removed and another layer of instability has become entrenched in Nigeria’s political economy.”