Shortly after global rating agency Standard & Poor’s (S&P) placed its credit rating for Nigeria on a negative outlook, the country’s politics and economics took further knocks. Former president Olusegun Obasanjo announced that he was leaving the party he founded, the ruling People’s Democratic Party (PDP), and tore up his membership card. He had long been publicly opposed to President Goodluck Jonathan, who is the PDP’s candidate in the presidential election scheduled for March 28, but the news that he destroyed his membership card on Monday, February 16, still caused plenty of comment in Nigeria and made worldwide headlines. The move was hardly a surprise as Mr Obasanjo had made it clear that he is supporting Mr Jonathan’s challenger for the presidency, Muhammadu Buhari of the All Progressives Congress (APC).
The PDP said that it was “deeply saddened” by Mr Obasanjo’s departure; the PDP is the party that Mr Obasanjo founded in 1999, when Nigeria returned to democracy, and on whose platform he won the presidential elections of 1999 and 2003. On Tuesday, February 17, six PDP lawmakers in the House of Representatives left their party, although only three crossed to the APC – two others joined the Labour Party and the last joined the minority Accord Party. It is also clear that more prominent Nigerians, in a larger part of the country, are in the Buhari camp, and that they will mobilise their voting networks in the polls. Mr Buhari also seems to have the support of Western elites. However, the advantage Mr Jonathan has, and it is a major one, is money. The elites on his side are the south-south heavyweights, especially businessmen close to Finance Minister Ngozi Okonjo-Iweala and Petroleum Resources Minister Diezani Alison-Madueke.
In other election news, the Independent National Electoral Commission (INEC) announced that it had distributed 75% of the 68.8 million permanent voter’s cards (PVCs) that voters will be required to use on polling day. This leaves it with about 16.6 million cards to hand out in the next five weeks, which sounds attainable. However, there have been many reports of cards being stolen or bought en masse, so it may yet happen that voters will be allowed to use their temporary voter’s cards, as in 2011, or another form of identification. On Tuesday, February 17, an APC rally in Rivers State was shaken by a bomb explosion and gunshots, after which panicked supporters fled the venue. A policeman was killed and five other people injured, including a reporter.
In the meantime, the Central Bank of Nigeria (CBN) announced that its bi-weekly foreign exchange auctions have been suspended, effective February 18. As such, the official bi-weekly foreign exchange window has been closed and the central bank instructed that all forex demand should be channelled through the interbank market in a move which amounts to a de facto devaluation of 18%. The CBN decision was motivated by the fact that the margin between the official trading band and the interbank market had grown too wide, which in turn resulted in “undesirable practices including speculative demand, rent-seeking, spurious demand, and inefficient use of scarce foreign exchange resources by economic agents.” This follows a fortnight of disruptive interbank trade and large fluctuations in system liquidity, and subsequently, fluctuations in overnight lending rates. The monetary regulator first showed signs of a de facto devaluation on Friday, February 13, by selling dollars outside of the official band at a special auction. The monetary regulator further stated on Wednesday that it will “continue to intervene in the interbank foreign exchange market to meet genuine/legitimate demands.”
Various other foreign exchange restrictions however remain in place. In effect, the interbank foreign exchange market will henceforth be order-based, and commercial banks need to present prior orders from corporate customers to be able to purchase forex from the CBN. According to Reuters, banks “will only be able to purchase foreign exchange if they have a prior order from a corporate customer.” The Financial Markets Dealers Association of Nigeria (FMDA) suggested that the CBN will now sell US dollars on the interbank market at an exchange rate of N198/$ for the time being.
The monetary regulator could certainly have dealt with this situation in a more orderly fashion – instead of introducing various forex restrictions (and on some occasions easing some of these restrictions shortly thereafter) and repeatedly stating that the local unit remained accurately priced – and even now, exact details of the way forward remain sketchy. This certainly does not bode well in relation to market perceptions of the CBN’s ability to maintain financial market stability and defend the naira. This uncertainty surely contributed to the mounting pressure on the currency and resulted in increased speculation – something which was to be expected given the increased distortion between rates under the multiple exchange rate system. Our baseline expectation is for the naira to retain its bearish bias as all forex demand is channelled via the interbank market, especially while external vulnerability and election-related uncertainty remain key risk factors.
Francois Conradie (Political Analyst), Cobus de Hart (Economist), Irmgard Erasmus (Fixed Income Analyst)