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Nigeria: Currency instability could raise election stakes

Nigeria’s embattled currency, the naira, has continued to slide on the back of low oil prices, closing at record intra-day lows against the dollar, even as the central bank intervenes.

Reserves fell by 3 percent – or $1.17bn – in two weeks as of 13 November to $37.49bn. The fall has raised concerns over the resilience of Africa’s largest economy and fuelled speculation the government may devalue the currency. This comes just months before scheduled presidential elections in February. With incumbent Goodluck Jonathan having announced his bid to secure a second, full term in office on November 16, the government is keen to avoid any economic upheaval. Senior officials have sought to tie the administration’s legacy to strong GDP growth over the past decade – a narrative that has been a cornerstone of the president’s reelection campaign.

“If they are forced into any depreciation of the naira, that could marr that [economic] record” which is “one of the few positive points that the Jonathan government has been able to point to,” says Martin Roberts of IHS Global Risk.

“I suspect that they are going to do everything they can to avoid that taking place before the election – if this means spending billions more dollars in their currency reserves, they are likely to do it.”

The central bank has been intervening to support the naira since 7 November according to Bloomberg, with little effect. The currency dropped to a new low of 177.65 against the dollar on 20 November. However, some analysts point out that the naira has been undergoing a gradual depreciation for some time as the official foreign exchange rate is adjusted. Several categories of foreign exchange have already been barred from auction, essentially fixing them at an interbank rate of 175 naira to the dollar.

“In de facto terms, the currency has already adjusted. It would be futile to attempt to maintain an artificial foreign exchange rate ahead of the elections, as this would only result in greater pressure on foreign exchange reserves,” says Razia Khan, head Africa economist at Standard Chartered Bank. “The key question is whether it stops at 160 – the current upper limit of the existing band – or continues beyond that.”

The stock market, which had dropped 1 percent as oil prices hit below $80 a barrel earlier in the month, rallied on the back of an appreciation of Dangote Cement stocks – the company run by Africa’s richest man, Aliko Dangote – which accounts for about a third of the exchange.

Bank politics

Despite the hefty price tag, a standoff on whether to devalue the currency rather than deplete the country’s currency reserves between the president and Nigeria’s central bank governor is unlikely. The former governor, Lamido Sanusi, was suspended by the president following claims that over $20bn in government revenues had gone missing from the national oil company. It remains to be seen how his successor, Godwin Emefiele, navigates the political landscape.

“He is aware that Sanusi was pushed out for political reasons, [so] he is more likely to do the bidding of the government. In other words, if they tell him to spend more money to prop up the naira, he will do so,” Mr Roberts explains. “Sanusi would have been more likely to say: we are spending billions of dollars for nothing, what we should do is devalue the naira. But of course that is politically unacceptable at the moment.”

Election uncertainty

As February’s elections approach, President Jonathan and his People’s Democratic Party (PDP) look set to take a comfortable majority. If successful, it will be his second win at the polls, though his third term in office. He controversially took office midway through his predecessor’s term. Umaru Yar’Adua died in office in 2010, when Goodluck Jonathan was the vice president. His decision to contest elections in 2011 violated a power sharing agreement between the predominantly muslim North and Christian south of the country – a move that has polarised the political sphere. The vote also takes place against the backdrop of an ongoing insurgency in the north of the country, where the government has struggled to contain the militant Islamist group Boko Haram. The conflict has claimed thousands of lives and made global headlines earlier this year following the abduction by the group of more than 200 schoolgirls in the town of Chibok.

Most recently, two attacks in the space of a week are being blamed on Boko Haram. A female suicide bomber entered a college in the town of Kontangora and detonated the explosives she was carrying on 12 November, killing at least three and injuring others. Only two days earlier, another suicide bomber killed 49 students and injured 86 others at a boys school in Potiskum. Senior government officials are keen to reassure the international community ahead of the vote. Speaking to This Is Africa, Minister of Finance Ngozi Okonjo-Iweala does not believe there will be significant instability around the upcoming polls.

“I do not see what this instability is about, people keep talking about the elections in 2011 – it was a bit tense because the former president died and there were constitutional issues,” she argues. “This stability and stuff – we do not see any issue.”

With a history of violence during presidential elections – 800 people died and thousands were displaced during the 2011 vote – observers will be watching closely as Africa’s most populous nation goes to the polls. “I think there would certainly be attempts to stage mass casualty attacks – polling centres, people queuing up to vote, they are easy targets,” says Mr Roberts of IHS Global Risks.

Compared with the threat posed by Boko Haram, Nigeria’s current economic woes might prove to be relatively minor – if handled properly. “It is debatable whether the elections matter much in this context. Measured against the destabilising impact of Boko Haram for example, a little currency weakness within a fairly narrow range is likely to be a minor event in the lives of most Nigerians,” says Standard Chartered’s Ms Khan.

“It only becomes a more serious issue if there is an outsized devaluation, and the Central Bank can avoid this by introducing more flexibility in the currency early on.” It remains to be seen whether the bank has the foresight and political maneuvering space to take such steps.

By Adrienne Klasa. 



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