Back in late June, Nigeria finally did the painful thing everyone said it had to do and unpegged its currency, the naira, from the US dollar.
Well, kind of.
The official exchange rate has actually been kept artificially stronger than the parallel market rate since then – which we outlined back in July.
Fast forward to today, the government appears to be committed to the stricter FX controls given that it based its 2017 budget on an exchange rate of 305 naira per dollar.
Moreover, those who trade the naira at an exchange rate weaker than 400 per dollar potentially look at arrest and prosecution by Nigeria’s intelligence service, according to report from Bloomberg back in early November. And finance minister Kemi Adesoun told Reuters by text message on Tuesday that Nigeria’s central bank is “working on the elimination” of the spread between the official and black market rates. Although, she failed to mention how this would be done.
"Nigerian policymakers seem committed to the FX policies that have strangled their country's economy. The situation is, however, unsustainable," John Ashbourne, Africa economist at Capital Economics, wrote. "We expect that the currency will be devalued again in 2017."
"The timing of this move is difficult to predict," he continued. "But we think that dwindling reserves and protracted harm to the real economy will eventually force a rethink. We've penciled in a N400/US$ official exchange rate by the end of 2017."
The naira is currently trading around 316 per dollar on the official market, but around 487 on the black market as of Monday. In the adjacent chart, you can see the difference between the official rate (black) and the parallel rate (purple).
It's not wholly unreasonable that a country like Nigeria, which relies heavily on revenues from its oil exports, would want to manage its currency. In fact, Saudi Arabia, another big oil producer, currently keeps its riyal pegged to the dollar.
The thinking here is that since the main source of revenue (oil) is priced in dollars, a stable currency helps make fiscal policy more predictable and helps avoid possibly destabilizing fluctuations in the exchange rate.
However, the artificially stronger official exchange rate has added pressure to Nigeria's already beleaguered economy.
"Officials - including President Muhammadu Buhari - have justified FX controls by claiming that they will boost demand for domestically-produced goods. There is little evidence that this is happening; manufacturing output fell in Q3 and the manufacturing PMI remained weak going into Q4," wrote Ashbourne.
"Nor has the policy protected consumers' purchasing power; the inaccessibility of the official FX market has forced most to use the weaker parallel rate, which has pushed up inflation. The controls have also deterred foreign investors," he added.
Against the backdrop of this, Nigeria continues to suffer from numerous problems, including lower oil prices, ongoing oil-production outages in the Niger Delta, and a "food crisis" in its northeastern Borno state.
And Nigeria's Bureau of Statistics recently reported that the country is stuck in a recession, with the economy shrinking by 2.24% in the third quarter, following a 2.06% contraction in the second.