As a frontier market, the countries of Africa represent both tremendous opportunities and tremendous risks. On the risk side of the ledger are all the usual complications of international trade and investment compounded by the problems inherent in a developing, emergent continental market consisting of 54 countries and 1.1 billion people – it’s a lot to keep track of.
Luckily, the ups and downs of the African currency markets are not one of them if you know where to look. To help with that, AFKInsider has compiled all the news you need to know now in order to slim down your currency risk in the week ahead. Let’s see what’s happening out there.
Nigerian currency falls prey to politics
The big news in forex circles this week has been the ouster this past Thursday of the Governor of the Central Bank of Nigeria, Lamido Sanusi, by Nigeria’s President, Goodluck Jonathan. Sanusi’s departure, which came out of the blue, struck the naira hard, and the hard-pressed Nigerian currency fell by 3.2-percent, its biggest loss since 1999.
Jonathan’s move to remove Sanusi was unexpected, but reports indicate that Sanusi had begun to cause problems for the president and his ruling circle after raising allegations of high-level mismanagement and corruption – not unknown in Nigeria – at the Nigerian National Petroleum Company, the national firm responsible for the handling of the government’s oil revenues.
In all, alleges Sanusi, some $20 billion-worth of revenue cannot be accounted for by the NNPC, much of it seemingly vanishing into thin air sometime between 2012 and 2013. In documents provided to the media, Sanusi says the most egregious indicator of funds being siphoned off come in the form of $8.4 billion in fuel subsidies marked off by the NNPC at various source locations throughout the country.
Since such subsidies had been banned by the last president and one fuel so subsidized by the company, kerosene, is not actually sold within the country, this would appear to be prima facie evidence of corruption on a vast and lucrative scale. Accordingly, Sanusi argues that the increased gap between Nigeria’s oil production and its revenues, which come at a time of relatively high global oil prices, could account for up to 200,000 barrels of Nigeria’s daily oil output.
For Sanusi, unraveling such high-level corruption is nothing new. Indeed, at the outset of his tenure as CBN governor in 2009, he made waves by investigating oil-revenue corruption while also dealing with a debt crisis in the country’s financial sector. Now, nearing end of his term as CBN governor – he was scheduled to step down in June – Sanusi apparently wishes to go out with a bang with his release of information into mismanagement, or worse, at the NNPC.
Indeed, reaction from government of Goodluck Jonathan, which has been hit hard by a string of political crises and an ongoing, deadly Islamist insurgency in the country’s north, was immediate. Sanusi, who had been out of the country at central bank conference in Niger, was effectively fired by Jonathan and replaced by his deputy. Upon returning to Lagos Mr. Sanusi was, according to media reports, relieved of his passport by members of Nigeria’s secret service.
Implications
Unfortunately, for most Nigerians and the risk-acceptant investors who have sunk money into Nigeria’s booming economy, l’affaire de Sanusi is par for the course for Nigerian politics. Corruption is rampant throughout Nigerian society, and in previous administrations, both military and civilian, the treasury has as often as not been left ransacked and pillaged by politicians and bureaucrats more interested in lining their pockets than benefitting the public welfare.
Still, this particular scandal comes at an unwelcome time. True, the Nigerian economy is growing, but Sanusi’s governorship of the CBN was noted for its professionalism and adherences to sound macroeconomic stewardship of the economy. While there is no reason to suspect that Sanusi’s successor will be any less hawkish on inflation or the strength of the naira, Sanusi’s firing is troubling because it ostensibly weakens the central bank’s independence vis-à-vis the political establishment. In the long run a consequence of this is that investors may have a right to fear that the central bank will be more at the beck and call whoever holds the presidency, and that politics, not sound economic analysis, will be guiding the CBN’s future decisions.
What’s more, this scandal will only put more intense pressure on the flailing administration of Goodluck Jonathan at a time when the country is consumed by politics. In a year Nigeria is scheduled to hold a general election, and one can only surmise that the added impact of Sanusi’s revelations about massive corruption at the NNPC and his resulting firing by the president will only compound gridlock in the nation’s capital. Expect, therefore, Nigeria to muddle through without much in the way of strong leadership until next February.
Finally, it is not at all clear that the Nigerian currency and the economy it supports will be able to withstand the combined fallout from the Sanusi firing and the political muddling in Lagos. With the currency dropping to a 15-year low already, the CBN has been forced to expend a large amount of its accumulated hard-currency reserves on propping up the naira. Given that the CBN has already spent ten percent of its currency reserves propping up the naira over the past year with little to come of it except a slowing of the naira’s decline against the dollar, this is troubling. With currency reserves expected to fall below $45 billion in the near future, it may turn out that Nigeria simply doesn’t have the foreign exchange reserves necessary to prop up the naira indefinitely or fight off a concerted speculative attack against it.
So, to sum up, investors should expect, at a minimum, much increased downward pressure on the naira for at least the next several months as the markets test the country’s new CBN chief. If such testing is hard or sustained long enough, the resulting drain on the country’s foreign currency reserves could lead to a financial crisis as investors dump naira for dollars. Combined with political deadlock until early 2015 at the very least, such an outcome could prove deadly for Nigeria’s economy.
Jeffrey Cavanaugh holds a Ph.D. in political science with a specialization in international relations from the University of Illinois at Urbana-Champaign. Formerly an assistant professor of political science and public administration at Mississippi State University, he writes on global affairs and international economics for AFK Insider, Mint Press News and BAM South.
