Early moves by Nigeria’s new president to put the country on a more orthodox economic track have been lauded by investors who hope Africa’s most populous country has passed a major turning point.
Bola Tinubu later on Friday suspended Godwin Emefiele, who has been governor of the central bank since 2014, citing “investigations and planned reforms in the financial sector”. Emefiele, who was later detained by Nigerian intelligence agencies, pursued a policy at the central bank of using the country’s vast foreign exchange reserves to prop up the naira.
It follows a decision by Tinnub, who took office last month, to scrap fuel subsidies that cost Nigeria more than $10 billion last year. The International Monetary Fund and the World Bank have long urged Abuja to stop subsidies and instead spend money on health and education, but successive governments have shied away from doing so.
Analysts said Tinubu’s first few weeks signaled a change in direction for Nigeria’s battered economy, which had stalled under his predecessor, Muhammadu Buhari.
“Markets are getting everything they hoped for from a change of president in Nigeria,” said Charlie Robertson, head of macro strategy at asset manager FIM Partners.
Kevin Daly, investment director at Abrdn, an emerging-markets specialist asset manager, said discussions about reform of Nigeria’s foreign exchange system were “another trigger for a sharp rally in Nigerian bonds”.
Nigerian euro bonds due in 2051 rose 3.8% to 73.8 cents on Monday, the highest since January.
“We haven’t seen positive reform momentum in Nigeria for a long time, and now we are,” Daly said. But he said investors still had to trust Tinubu, who pledged to keep interest rates low in his inaugural speech, to a sustained shift toward economic orthodoxy.
“We’ve seen what happened in Turkey,” he said. “It’s important for him to understand that interest rates have to go up to attract foreign investment into the local bond market, and you can’t start talking about lower rates until there’s been a significant drop in inflation.” Annual inflation was 22.22 percent in April.
Razia Khan, chief economist for Africa and the Middle East at Standard Chartered, said the removal of the subsidy and removal of Emefiele “partly signaled” a commitment to reforms in Nigeria’s foreign exchange market. Tinubu said last month that monetary policy needed to be “cleaned up” and that the multiple exchange rate regime introduced by Emefiele should be unified.
Allowing the naira to trade freely against the dollar to reflect its true value has been rejected under Buhari, with the central bank using multiple “windows” to sell dollars cheaply to sectors deemed vital to the economy. That provides an avenue for arbitrage, as well-connected businesses buy dollars cheaply from banks and sell them for higher prices on the black market.
The central bank has held the key naira rate at around 460 per dollar for most of this year, down from around 380 per dollar before the pandemic. But the greenback is currently changing hands in the parallel market at around $740 to the dollar. The dollar shortage, also due to low oil production, has forced many businesses to purchase hard currency at parallel rates.
Robertson said the removal of costly subsidies and the potential convergence of foreign exchange rates would be “very important for Nigeria’s budget” and delayed the risk of default, which he said was a “serious concern” for at least a year. Folashodun Adebisi Shonubi, one of Emefiele’s deputies, has taken over as interim central bank governor.
While investors support the central bank’s policy and personnel changes, there are concerns that Emefiele’s unceremonious ouster could threaten the institution’s independence. Nigeria’s president can only legally remove the head of the central bank by a two-thirds majority of the country’s 109-member Senate.
In 2014, former President Goodluck Jonathan suspended central bank governor Ramido Sanusi for “financial recklessness”, a move widely seen as politically motivated, after Sanusi claimed the state oil company had spent 20 billion dollars. Dollars are gone. He challenged the dismissal, but the court declined to hear the case.
Cheta Nwanze, a partner at Lagos-based consultancy SBM Intelligence, said the manner in which Emefiele was suspended was “full of illegality”.
“The Central Bank Act doesn’t fully give the president the powers he just exercised,” he said. “This is a bad precedent, which was set when Emefiele’s predecessor was removed from office, and yet another layer of instability has become entrenched in Nigeria’s political economy.”