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.
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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".
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Andrew is the editor of MoneyWeek magazine. He grew up in Vienna and studied at the University of St Andrews, where he gained a first-class MA in geography & international relations.
After graduating he began to contribute to the foreign page of The Week and soon afterwards joined MoneyWeek at its inception in October 2000. He helped Merryn Somerset Webb establish it as Britain’s best-selling financial magazine, contributing to every section of the publication and specialising in macroeconomics and stockmarkets, before going part-time.
His freelance projects have included a 2009 relaunch of The Pharma Letter, where he covered corporate news and political developments in the German pharmaceuticals market for two years, and a multiyear stint as deputy editor of the Barclays account at Redwood, a marketing agency.
Andrew has been editing MoneyWeek since 2018, and continues to specialise in investment and news in German-speaking countries owing to his fluent command of the language.
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