NIGERIA: OIL PRICES
Nigeria has devalued its currency by nearly 10 per cent and raised interest rates to record levels, in one of the clearest signs yet of how oil producing nations are struggling as energy prices drop sharply.
The Nigerian central bank on Tuesday said it had pegged the value of the naira at a midpoint of N168 to the US dollar, 8.4 per cent lower than the N155 to the dollar, which it adopted in 2011. The bank announced it would allow the currency to fluctuate plus-minus 5 per cent around the midpoint, wider than the previous plus-minus 3 per cent.
The bank also raised its benchmark interest rate for the first time in three years to a recent record 13 per cent, up a full percentage point from 12 per cent.
"Current challenges require bold policy measures", Godwin Emefiele, governor of the central bank, said in Abuja, the Nigerian capital.
The measures come as Africa's largest oil-producing nation and a key member of the Opec cartel faces tough choices ahead of general elections as oil prices drop to $80 a barrel, down roughly 30 per cent in three months.
Opec is meeting on Thursday in Vienna to discuss measures to shore up oil prices, which have fallen from more than $100 a barrel three months ago due to the combination of rising US shale supply and much weaker demand in China.
The timing of the oil price drop is bad news for President Goodluck Jonathan. Presidential elections are scheduled for February and are widely expected to be the most divisive since the military restored civilian rule in 1999.
Mr Jonathan's critics are focusing in on his stewardship of Nigeria's oil resources, on which the country depends for more than 70 per cent of government revenues and more than 90 per cent of hard currency earnings despite the rapid growth of other sectors of the economy. They blame the shortage of savings available to shore up finances on the profligacy of corrupt officials during the boom years when oil prices were high.
Mr Emefiele, who is facing his first crisis since taking over from Lamido Sanusi as governor earlier this year, said falling foreign exchange reserves were constraining the central bank's ability to defend the value of the naira. Gross foreign reserves have plunged $2bn over the past month to a five-month low of $37.2bn. Foreign exchange reserves were nearly $60bn before the global financial crisis of 2008-09.
In 2009 Nigeria had $20bn in savings in its excess crude account, which holds surplus earnings from oil sales, and was able to spend its way through a temporary oil price crash. This time it has a much smaller cushion, with only about $4bn in the account. Even this is under pressure from state governments, who are constitutionally entitled to a share.
The shortage of savings and hard currency reserves is partly the result of huge shortfalls in oil revenues being remitted to the treasury during the recent boom. Mr Sanusi, the former central bank governor, was suspended earlier this year after he alleged that up to $20bn owed by the state oil company was unaccounted for and warned he would be unable to defend the naira should there be an oil price shock. The findings of a PwC audit commissioned by the government on the allegations were due in August but have yet to be made public.
The central bank governor pledged on Tuesday to defend the currency "within the limits of available reserves". The naira on Monday hit a record low of N178.45 and after the policy announcements on Tuesday it traded at N177.
The currency's fall has been accompanied by a slide in the stock exchange, which is down by 15 per cent since the start of the year as foreign investors rush to exit.
The naira devaluation would be politically sensitive, given its inflationary impact in a country dependent on imports for consumer goods from gasoline to clothes.
While the oil price is still within budget forecasts, Nigeria's government has less room for manoeuvre than in the recent past and Mr Emefiele on Tuesday warned that the current budget assumption of $73 a barrel "may be overly optimistic".
Earlier this month, Ngozi Okonjo-Iweala, the co-ordinating minister for finance and the economy, sliced projected spending by 6 per cent and lowered the budgeted price for oil to $73 from $78 in the 2015 budget. Ms Okonjo-Iweala could soon announce further cuts in the budget, including on fuel subsidies.
Such a move would be politically sensitive; the prospect of subsidy reductions has already drawn opposition from Nigerian unions. An attempt by Mr Jonathan to eliminate the subsidy in 2012 prompted widespread protests.
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