Impressive potential in Nigeria

The Nigerian government has bowed to the inevitable and scrapped its currency peg to the US dollar.

799-Naira-1200
Bowing to the inevitable: the naira lost its dollar peg

"I'm surprised it lasted as long as it did," John Ashbourne of Capital Economics told The Wall Street Journal. The Nigerian government bowed to the inevitable last week and scrapped its currency peg of 197 naira to the US dollar, which had been in place for over a year. The naira, which had already reached a rate of 370 to the greenback on the black market, promptly slid by around 30%.

Beset by dwindling oil revenue, the government feared a rise in inflation and hence interest rates if it let the currency fall. That would temper growth and hurt companies with foreign-currency debt. But the side-effects of keeping the currency artificially high proved worse. Foreign-exchange reserves, spent defending the peg, have fallen to a decade low.

The government tried to preserve them by banning imports, but this has created scarcity, fuelling inflation already around 15% and hampering industrial production and development. It has also forced people and firms into the black market. To make matters worse, foreign investors hold back in these situations, assuming that the peg will have to be ditched at some stage, thus depriving the country of valuable cash. Now the government has tacitly acknowledged that a weaker currency would encourage domestic production more than import bans can, and will ultimately hurt consumers less.

Foreign investors should now return, not least because the economy's long-term potential is impressive, says William Railton in City AM. Two years ago it overtook South Africa as the continent's largest economy, and while oil is its main export, it has been trying to diversify. Services comprise 50% of output and the growing middle class bodes well for consumption.

Infrastructure and corruption remain key weaknesses; the World Bank estimates that $400bn in oil revenues has been stolen since independence in 1960. Devaluation is no miracle cure, but it is certainly a step in the right direction.

Surprise exit for India's bank chief

"Nobody knows why," says Economist.com. Perhaps Prime Minister Narendra Modi is "placating the chauvinist arm of his party peeved by [Rajan's] tendency to denounce intolerance". His attempt to clean up bank balance sheets may have irritated India's "crony capitalists", while his refusal to lower interest rates despite political pressure tamed inflation.

Investors should keep a close eye on his successor. The next governor must resist political interference, says Una Galani on BreakingViews.com especially now that the RBI is setting up a new monetary policy committee, three of whose six members will be appointed by the government. It will also be crucial to complete the banking reforms Rajan started. The new governor "will struggle to match" Rajan's authority. Meanwhile, India's credibility "will suffer".

Recommended

I wish I knew what an emerging market was, but I’m too embarrassed to ask
Too embarrassed to ask

I wish I knew what an emerging market was, but I’m too embarrassed to ask

This week's “too embarrassed to ask” explains what emerging markets are, and why you might want to invest in them.
9 Sep 2020
Bullish investors return to emerging markets
Stockmarkets

Bullish investors return to emerging markets

The ink had barely dried on the US-China trade deal before the bulls began pouring into emerging markets.
27 Jan 2020
Why investors should beware of India’s surging stockmarket
Emerging markets

Why investors should beware of India’s surging stockmarket

The BSE Sensex benchmark index has soared by 90% since March, largely driven by foreign investors. But India's bull market is very vulnerable.
15 Jan 2021
How to invest in Africa as it takes its place in the post-pandemic sun
Emerging markets

How to invest in Africa as it takes its place in the post-pandemic sun

The African Continental Free Trade Agreement has come into force. Favourable demographics, improving governance and a growing technology sector also b…
14 Jan 2021

Most Popular

Bitcoin: fool’s gold or the new gold?
Bitcoin

Bitcoin: fool’s gold or the new gold?

With bitcoin hitting new highs last week, and close to becoming a mainstream investment, is it really gold for the 21st century?
15 Jan 2021
The MoneyWeek Podcast: bitcoin special
Bitcoin

The MoneyWeek Podcast: bitcoin special

Merryn talks to bitcoin experts Dominic Frisby and Charlie Morris to get the lowdown on the cryptocurrency to find out why it's such a huge global phe…
15 Jan 2021
Leasehold reforms promise the end of a nightmare for many homeowners
Property

Leasehold reforms promise the end of a nightmare for many homeowners

Horror stories about unscrupulous landlords profiting from a legal relic of the feudal era are about to get a happy ending, says Simon Wilson.
16 Jan 2021