Turbulence in the Nigerian dollar market affects airlines and investors

These days the supply of dollars in Nigeria is so small that even the big international airlines are struggling to repatriate the revenue from ticket sales. Emirates announced it would suspend flights to and from Nigeria starting in September, resuming flights to Lagos only when the central bank released $ 265 million of the estimated $ 464 million the airlines claim to be seated on.

Currency traders and investors say Nigeria’s chronic dollar shortage, a constant denounce of businesses operating in the country, has recently gotten into crisis. The naira, which is officially trading at N421 per dollar, has dropped to N700 on the parallel market, with rumors that it could weaken further.

“It really is a perfect storm,” said Iyin Aboyeji, a fintech entrepreneur in Lagos. “Nobody could have foreseen it: low oil production and high dollar demand.”

On the supply side, oil dollar revenues plummeted due to the massive theft, pushing official daily crude oil production down to 1.1 million barrels, far below Nigeria’s OPEC quota of 1.8. millions of barrels per day. Angola has now usurped Nigeria as Africa’s largest oil producer.

Nigeria’s gasoline subsidy, under which its car owners enjoy one of the cheapest fuels in the world ($ 0.40 per liter), means the federal government receives less revenue. The higher the price of oil, the greater the gap between the real and the subsidized price and the greater the bill for the government. Nigeria will spend about $ 9.6 billion on oil subsidies this year, about 2% of gross domestic product and nearly 10 times the budgeted amount.

On the demand side, August is always a tough month as around 100,000 Nigerians need dollars for university tuition abroad.

Political parties have also scrambled to get dollars to distribute to delegates at the presidential primary held in May and June, further pushing supply and demand out of balance. Central bank governor Godwin Emefiele may have compounded the problem by warning politicians that those caught exchanging naira for dollars on the black market would be arrested.

Naira line chart (mln), 12-month moving average showing oil dominates Nigerian exports

Wilson Erumebor, an economist at the Nigerian Economic Summit Group, a group of experts, said of the widening of the black market spread: “If we had a sufficient supply of foreign currency, this would never be a problem.”

The collapse of the naira makes imports more expensive, fueling inflation, which hit a 17-year high of 19.6% in July. The central bank has raised interest rates by 250 basis points to 14% since May.

Nigeria has a complex and opaque exchange rate regime with multiple exchange “windows”. The central bank tries to manage limited supply and to prioritize the allocation of dollars to areas of the economy, such as agriculture, which it deems priority. Last year, the bank stopped selling dollars to exchange bureau operators to protect its limited reserves of $ 38 billion, further scaring the market.

“The black market is the free market,” said Aboyeji, who added that Nigerians who need dollars for things like tuition should use the parallel market instead of receiving what’s actually subsidized in dollars at the official rate.

Investors complain that the multi-window system is unnecessarily opaque. Those who receive dollars can buy naira on the black market in a move known as a “round trip”.

The dollar crisis in Nigeria has its origins in the oil price crash of 2014, when prices fell by 52% in six months. The federal government, which collects taxes worth only 6% of GDP, one of the lowest rates in the world, earns most of its income and nearly 90% of its foreign exchange from oil exports.

Eromebor of the NESG said Nigeria’s problems were compounded by the lack of significant exports in sectors other than oil. Data from the National Statistics Agency estimates Nigeria’s 2021 non-oil export earnings at $ 16 billion versus $ 145 billion from crude oil sales.

Years of insufficient investment in oil infrastructure have eroded production, which means Nigeria has not benefited from the higher oil prices resulting from the Russian invasion of Ukraine. The widespread theft of crude oil, estimated by the Nigerian National Petroleum Company at 400,000 barrels per day, has depressed production. Some pipelines have suspended operations, including a Shell installation that closed in June. The Nigerian authorities have instructed the Ekpemupolo government, a former militant in the Niger Delta, to secure the pipelines.

Nigeria’s other sources of foreign exchange income also declined. Foreign direct investment in 2021 was just under $ 700 million, down from $ 3.1 billion at the start of President Muhammadu Buhari’s term in 2015.

Mosope Arubayi, an economist at IC Group, an investment consultancy firm, said Nigeria has become less attractive to foreign investors, partly thanks to the difficulty of repatriating revenue.

“The FX market is very tight in terms of liquidity,” he said. “Nigeria is significantly dependent on oil inflows, but other capital flows such as remittances are needed, most of which do not go through official channels.”

Half a dozen analysts and executives interviewed by the Financial Times, who declined to be named for fear of central bank retaliation, said the bank’s policies are hurting the investment environment.

“They don’t give you any indication of when you will be able to get your money out of the country,” said one executive, adding that their company will not make any further investments until the matter is resolved. “Investors are leaving.”

Experts have said that there will be no significant change of strategy before the presidential elections to be held next February.

But Renaissance Capital’s Charlie Robertson said the central bank could only delay the inevitable. “In the face of economic realities, you don’t have the resources to fight the market forever,” he said.

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