Nigeria is keeping control of its naira currency despite demands for deeper reforms from the International Monetary Fund and World Bank and complaints from businesses.

The multilateral institutions say a free-floating naira would help the economy withstand future shocks. But Nigerian authorities fear inflation stemming from a sharp devaluation could throw millions into poverty.

Last week, central bank governor Godwin Emefiele denied the country was adopting a new foreign exchange management policy, while vice president Yemi Osinbajo said the government would itself use a more flexible rate.

What is happening to the naira, and why? Here are some key facts about Nigeria’s currency and recent monetary policies:

WHAT’S PRESSURING THE NAIRA?

The Covid-19 pandemic and oil price crash hammered Africa’s largest economy, 90% of whose foreign exchange earnings come from oil exports, pushing it into its second recession in four years.

It narrowly exited the recession in the fourth quarter, but the drop in oil revenues led to a balance of payments deficit of $14 billion last year and has depleted its foreign reserves.

WHAT’S AT STAKE?

The government of President Muhammadu Buhari, who took office in 2015, has kept the currency artificially high as a matter of national pride.

During the last oil price crash, in 2016, CBN created a system of multiple exchange rates in order to avoid a large official devaluation. These included a market-determined rate for investors and exporters called the Nigerian Autonomous Foreign Exchange Rate Fixing (NAFEX).

Faced with a 5.6 trillion naira ($15 billion) budget deficit this year, the government is seeking a $1.5 billion loan from the World Bank. But in return, the World Bank wants Nigeria to do more to bring the official exchange rate of 381 naira per dollar and other rates, including NAFEX, into line.

WHAT HAS THE CENTRAL BANK DONE SO FAR?

CBN devalued the naira’s official rate twice last year and has weakened the exchange rate for retail users.

The bank has continued to gradually adjust the currency since the devaluations, limiting dollar access for imports and implementing restrictive forex policies to support the naira.

After oil prices crashed in 2014-16, Nigeria raised interest rates to attract investors. But when crude prices plunged last year and foreign money fled, the central bank reduced yields on treasury bills in order to boost naira liquidity.

HOW HAS THE NAIRA POLICY AFFECTED INVESTMENT?

The naira’s value and issues with dollar liquidity are major deterrents to business and investment in Nigeria.

Twelve-month non-deliverable forward contracts quote the dollar at 465 naira, which implies the local currency is currently overvalued by around 18%. Patrick Curran, senior economist at emerging markets consultancy Tellimer, said that essentially guarantees a loss on investment when the currency is forced to adjust, unless returns exceed the overvaluation.

Nigeria’s debt is among Africa’s lowest-yielding, which the government is counting on as it seeks to cover this year’s large financing needs via cheap local borrowing.

But historically low yields mean renewed inflows will be deterred even if the currency issues are resolved, said Samir Gadio, head of Africa strategy at Standard Chartered Bank. Foreign investors have dumped local assets because of the low yields.

WHAT NEXT?

CBN has offered cheap credit to try to boost manufacturing and agriculture in order to cut imports. It has also eased rules on diaspora remittances to increase dollar liquidity, after the naira fell sharply on the black market.

Those measures have not boosted the economy so far, however, and Tellimer’s Curran said the central bank has “effectively sacrificed growth at the altar of naira stability”.

“This policy has failed to accomplish the stated goal of low and stable inflation, and instead has exacerbated price increases via FX shortages and parallel market depreciation,” Curran added.

Without a significant oil price rebound, analysts say the cost of imports and of meeting offshore debt obligations will further deplete Nigeria’s dollar reserves.

Reuters