Whether or not Emefiele scraps a system of multiple exchange rates and lets market forces have more sway over the naira is a key question for foreign investors. Under Emefiele, the central bank has pegged the naira’s official price at 305 per dollar, while allowing investors to trade it in a separate window at around 360.
The International Monetary Fund has long said the absence of a single exchange rate hinders growth and makes for an opaque system. Moreover, Renaissance Capital says the currency is overvalued even in the market window — where its price has barely budged in the past 18 months, thanks in part to central bank meddling — and should be almost 20% weaker at 440 against the greenback.
There’s little sign that Emefiele or Buhari will change their stance soon. And with foreign reserves having risen 8% since November to $45 billion, the governor has the firepower to defend the currency for longer.
Emefiele has been a godsend for carry traders this year. His policy of keeping a tight grip on the currency and yields on short-term bonds elevated has made the naira one of the juiciest bets in emerging markets. Naira bonds have returned 10% in dollar terms this year, the fourth-best performance among major developing nations, according to data compiled by Bloomberg.
The problem for carry traders is that Emefiele may have to change tack at some stage, given that a combination of an overvalued currency and high interest rates high is hardly conducive to boosting one of Africa’s slowest-growing economies. Reflecting investors’ concerns about growth, the stock market has dropped 8.5% this year, one of the worst performances globally.
Can Emefiele bring the inflation rate down? It’s been above the central bank’s target of 6% to 9% — which the governor barely refers to these days — for almost four years. It’s fallen from a peak of almost 19% in early 2017, but still stands at 11.3%. It will probably average 11.5% this year, the most after Egypt and Angola among big African economies, according to a Bloomberg survey.
Monetary policy rate:
Nigeria’s main interest rate, known as the monetary policy rate, has become largely irrelevant under Emefiele, given his prioritization of short-term securities and the cash-reserve ratio (currently set at 22.5% of banks’ deposits) to control liquidity. If the MPR regains its importance, that would be a sign Emefiele is returning to more orthodox monetary policies, and may perhaps even be a step toward unifying the naira’s various rates.
Emefiele has increased the central bank’s development-finance activities, which include subsidized lending to farmers and manufacturers. The governor says such measures have helped provide millions of jobs and are a way to support the economy’s industrialization. Critics, including the IMF, say the schemes are prone to corruption and distract the central bank from its core function of maintaining price stability.
Spats with foreign companies:
Emefiele unnerved investors last August when he said that South Africa’s MTN Group Ltd. had illegally repatriated $8.1 billion of dividends from Nigeria and insisted it be returned. The company was cleared of wrongdoing after four months of negotiations. But the spat dented Emefiele and the Buhari administration’s claims that they would improve the business environment for foreign firms.