Charles Robertson: Is Nigeria the next Venezuela?
Multiple exchange rates, a reluctance to officially devalue the currency and a forex shortage are a few similarities between Nigeria and Venezuela that have fuelled concerns that Nigeria may be on the path of economic decline seen in the South American oil-producing nation. CNBC Africa’s Wole Famurewa, spoke to Charles Robertson, Global Chief Economist, Renaissance Capital for his views on the debate.
ROBERTSON: It was a comparison that we remained concerned about this year because you had the government with an official rate of two hundred naira to the dollar and an unofficial rate of about three hundred and there was talk of introducing another rate and it all ended up with a number of different rates and that was where Venezuela began in 2003, with capital controls they have had over four rates for their currency. They meant well in Venezuela, the government wanted to help the poor, they were trying to use oil generated revenue to support the impoverished in the society and they ended up in very high inflation, the economy in chaos, shortages, and it has been a disaster in the end. That was our concern that Nigeria was heading down that road some months ago.
So are you sufficiently relieved that Nigeria is not heading down that road or do you think that more reforms are needed?
ROBERTSON: I think Nigeria made the right decisions and policies in the last months to avoid that bad Venezuela scenario. Let me give you one example, right now the official exchange rate is about ten Bolivar to the dollar, the unofficial rate is about a thousand Bolivar to the dollar and that will be an equivalent of about 20,000 to the dollar or 30,000 naira to the dollar at the unofficial rate. In fact, today the unofficial rate of the naira to the dollar is around 420 to the dollar while the official rate is about 320 or so. So the spread between the official and unofficial rate is much tighter in Nigeria, still not perfect as there are still more reforms to be done. They have to get oil production up and I think that is the big challenge to stabilize the currency and I think they are not making mistakes on the currency like Venezuela did.
Help us appreciate the danger of having multiple exchange rates in an economy like Nigeria. Especially when you consider that so much is imported into the country.
ROBERTSON: In the speech made by the Queen of England recently, she said that the people just trade off the back of this parallel exchange rate. They will get official dollar rates sometimes and then trade against it, make money without actually doing anything productive for the economy and that sort of thing in Venezuela is extremely common; people are arbitraging between exchange rates and not actually investing in the economy to make it better. In Nigeria’s case however, they are trying to avoid this mistake.
In Nigeria, not necessarily the exchange rate but the dollar seems to be a scarce commodity. In this context, it is almost inevitable that we would have multiple exchange rates because there would always be the parallel market for those who are willing to pay more to get the dollar. In your view, what is the best way to manage that scenario?
ROBERTSON: That difference we are seeing right now between the official and unofficial markets is odd and I think it reflects the fact that oil production is been hit that instead of it been two million barrels a day, it’s now about one and a half million barrels a day. So I think the cause is the lack of dollars because there is a lack of exports. I’m still somewhat surprised that the two rates have not converged better despite that but I suspect it is the oil story. What I’m guessing is, that either the oil production needs to come back to two million and if that happens I think the unofficial rate will strengthen back towards the official rate or the official rate needs to converge closer to the unofficial rate, more like 350 to 400 to the dollar but something needs to happen to oil production.
While were hoping that something does happen with oil production, what’s the next best thing? Many have suggested that perhaps the government needs to consider either selling some of its Assets to raise dollars or borrowing internationally as a way out because the longer this scenario continues more and more jobs are lost and there’s more pressure on the government in terms of the outcry for some type of relief.
It is obviously a tough time for government. Do you really want to sell your assets when the currency is this weak and when the economy is this weak or do you want to sell your assets when the economy is better and when you can get a much better price for it? The politics of that is really awkward. No one wants to sell an asset at cut price level. However, if that is a way of getting the economy going and improving management and getting certain companies to run better, then there is an argument for selling even at a cheap price. It is fine to borrow in dollars. Most countries would consider going to the IMF, I understand there is reluctance in Nigeria to do that but they also provide the reassurance to investors. If the IMF is involved, then investors will feel more comfortable putting their money here. That does not seem such an option, so a third option could be Eurobonds although it might not be the best time to do it because oil production is low. If the currency can really find a key rate to converge with the unofficial rate then I think the foreign investors will again come back into Nigeria.
Let’s talk about the IMF for a moment here because many will suggest that this is something you don’t consider unless you are in a super crisis but looking at what Nigeria is going through now, giving the rising spate of unemployment, more and more factories closing down, this is quite a crisis to deal with. Why do you think there is the hesitance to go to the IMF and what does a country give up with an IMF deal?
ROBERTSON: I’ll argue that. The UK went to the IMF in the 1970’s when we were having a balance of payment crisis when our reserves were low and many countries around the world have done so but right now, you have countries like Kenya, borrowing from the IMF and Morocco as well but they have a precautionary deal with the IMF so if you need cash, it is there but generally it is just providing reassurance to foreign investors that there is that support. Getting IMF’s support should not be seen as a negative during the global financial crisis, Holland and others went to the IMF for support and wouldn’t have taken that as a negative. From my perspective as an economist, I see that as a good thing. I am a supporter of IMF support; I think the IMF gives good advice. They have looked at two hundred economies around the world and can tell you what works and usually, it helps. So I am on the side of thinking it’s a good thing to have the IMF there.
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