Nigeria can adopt “Egypt-style” reforms as growth concerns boil


By Lolade Akinmurele

Nigeria can tow the path of African peer, Egypt, as the downsides of trade and fiscal deficits on weigh on economic resurgence.
In the second half of 2016, Egypt kick-started a raft of reforms which led to the adoption of a flexible exchange rate regime, increase in Value Added Tax (VAT) and reduction in energy subsidies.
Nigeria has already opted for a VAT increase and claims it is committed to a subsidy removal. However, it has shrugged off calls to adopt a truly flexible exchange rate regime, having subtly returned to the currency peg it claimed to have abandoned in June, 2016.
A sincere adoption of the Egypt-style reforms would be long-term positive in trimming Nigeria’s N2.4 trillion 2017 budget deficit and boosting foreign capital flows; but may bring short-term pain to consumers.
Egypt’s reforms resulted in a 36.6 percent decline in the value of the Egyptian Pound to the Dollar and bolstered investor sentiment in Egyptian assets as increased capital flows drove the local bourse 76.2 percent northwards in 2016.
To ease the short term pains being felt by Egyptian consumers and corporates with foreign currency liabilities, social protection programmes and structural reforms to ease business climate were introduced.
It can suffice for Nigeria, which has already started welfare programmes of its own, like the conditional cash transfer of N5, 000 targeted at the most vulnerable persons in the country.
Nigeria is known for dragging on reforms but is running out of time faster than ever at the moment given that the current administration has barely four quarters to fix the economy.
The country is on the brink of a first full year economic contraction in 25 years, brought on by low oil prices and production, as well as a plethora of awful policies like capital controls, which inflicted severe damage on economic output.
A N7.2 trillion budget is in the works this year, as the country attempts to spend its way out of recession. But to rejig growth, much will depend on critical reforms needed to change the tide of the current macroeconomic realities, which continue to deter foreign capital inflows.
“I have never seen how a government doggedly tries to manage an exchange rate system that it clearly does not have the ability to,” said Manji Cheto, a policy risk analyst and senior vice president with global advisory firm, Teneo Intelligence.
“I do not think devaluation is the right strategy anymore, Nigeria needs a flexible exchange rate where there is a market-determined naira dollar exchange rate in order to boost autonomous capital inflow, with CBN intervention only at highly volatile times,” Cheto told BusinessDay by phone.
In contrast to events in Nigeria, emerging markets such as Russia and Brazil, which were also negatively affected by the fall in commodity prices with pressures on their respective domestic currencies and prices, maintained a flexible foreign exchange policy and implemented market friendly policies to buoy confidence and adjust to the oil shock.
As such, inflation rates trimmed to 6.1 percent and 6.3 percent in December 2016 from the highs of 17.5 percent and 10.8 percent respectively in 2015.
Brazil and Russia recorded Capital inflows (FDI and FPI) worth US$261.6bn and US$31.1bn in the first nine months of 2016 compared to outflows of US$284.3bn and US$39.9bn in 2015 respectively.
Also, the Russian Rubble and the Brazilian Real appreciated 20.1 percent and 22. percent after depreciating 20.3 percent and 32.8 percent, respectively in 2015.
Meanwhile, the total value of capital imported into Nigeria in third quarter 2016 was estimated at US$1.8bn; this represents a 33 percent decline when compared with the corresponding period in 2015.
Within the period, the Naira recorded the worst performance of all asset classes, tumbling 35 percent and 46 percent against the US Dollar in the official and parallel markets respectively while also underperforming Emerging and Frontier market peers.
The maintenance of a hard foreign exchange (FX) peg amid weak liquidity increased the spread between official and parallel market rates to an all-time high of N180.00 at US$1 in December 2016.
A half-hearted attempt to introduce flexibility in management of the foreign exchange market was conceived in May 2016 and partly implemented in June.
The reforms included introduction of a Naira settled derivatives market for hedging foreign exchange exposures and a return to conventional inflation-anchored monetary policy, which culminated in a 200bps hike in interest rate.
However, despite the initial optimism which followed these steps, the political and administrative will to follow through with the reforms have not been enough. Hence the reversal to a pegged exchanges rate system, while maintaining capital control policies.
By Lolade Akinmurele

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