Nigeria’s recent experience is an example to prove that politics is an essential factor that can enhance or mar the prosperity of an economy. Economic growth has been frustrated as result of dwindling oil prices in international market, which in turn fuelled depletion of the nation’s foreign reserves. Foreign investors were sceptical about Nigerian markets starting late last year. Political uncertainty before recently concluded elections twinned the negative impact as there was heavy capital outflow, frustration in currency exchange rate, heightened inflation rate and deficit of liquidity in banking sector.
There were two theories arguing the cause of liquidity deficit. While some analysts opined that implementation of the Treasury Single Account, which bar banks from accessing funds belonging to ministries, departments and agencies of government was the cause, others insisted that the scenario was as a result of massive withdrawal of cash from deposit money banks by politicians and their associates in preparation for the general elections. However, it is a tradition in Nigerian political sphere to spend money in cash for campaigns and to lobby large number of grassroot voters.
By November 2014, Central Bank of Nigeria (CBN) took a controversial step to devalue naira by 8.38 percent to US dollar to subdue high pressure put on the local currency coupled with excess liquidity level in banks. As result of devaluation, inflation rate ballooned to 8.4 percent by February 2015 and surprisingly, US dollar has begun to emerge as a legal tender in the country.
Investigation by Economic Confidential revealed that top politicians and some corporate bodies transacted more in dollar than naira, this result to serious fall in value especially at parallel market. Foreign exchange dealers, who spoke with the magazine on the condition of anonymity, said the naira tumbled a week to the presidential election and three days to governorship elections after politicians mopped up dollars on the streets of Lagos, Abuja, Kano and Port Harcourt. It was against this backdrop that CBN issued a warning to the public to desist from dollarizing the economy or face six-month jail as a penalty.
“The naira is falling because politicians are buying dollars massively on the street market to fund the campaigns ahead of the presidential and governorship elections,” one dealer said.
Now that the elections are over, there has been a calming down of volatility. The dollar which rose sharply before the March 28 election, selling for as high as N225 crashed just a few hours after the conclusion of the presidential poll. At a point, a dollar sold for as low as N170 at the unofficial market. Many had been nervous about the potential for the election to spill into uncontrollable violence and as such stashed up dollars in anticipation of the worst outcome. With the election turning out well and uncertainty out of the way, the economy is witnessing a bounce.
As investors pumped N1.8trillion into the economy, the Nigerian capital market gained 8.30 per cent, its single biggest daily gain this year, wiping off the negative year-to-date (YTD) performance, after the INEC declaration of presidential election result. Market capitalisation of the listed equities in the first quarter of 2015 went down by N76 billion to close at N10.718 trillion while the Nigerian Stock Exchange (NSE) All-Share Index (ASI) fell by 8.40 per cent to close at 31,744.82 on March 31. Operators in the Nigerian financial market are optimistic that the market will bounce back with the incoming president, General Muhammadu Buhari, a disciplinarian who had promised to reshape the nation’s economy.
Though in snail speed, it is foreseen that there will be increased inflow of both foreign direct and portfolio investments into the country driven by improved perception of the country’s potentials by foreign governments, investors and rating agencies. Analysts anchored this perception on Nigeria’s position as the largest economy and most populous country in Africa, coupled with the body language of foreign observers and stakeholders which, in their opinion, suggested a preference for Buhari’s candidacy. Many expect a turnaround in the nation’s economic fortunes.
Mr David Adonri, CEO, Highcap Securities Limited observed that ‘the election is over and people have started gradually coming back into the market and other areas of the economy would also start gathering momentum’. He pointed out that the gains witnessed in the capital market were expected to continue, as we foresee more investors expressing willingness to partake in this rebound.
However, some economic analysts have described the new development in stock market as brief and transient, arguing that the economy is still in bad shape as many businesses and ordinary Nigerians can feel the cash crunch. Prices of goods and services have also gone up further eroding the disposable income available to most Nigerians. The argument is that nothing fundamentally has changed in the system and that the stock market re-bounce and the current threshold in the naira value were all driven by market sentiment in favour of the change of leadership in the country.
A financial manager, Mr. Bismarck Rewane, argued that whatever takes place in the market without any correlation with the prevailing fundamentals will not last. He hinted that ‘You can’t run away from the fundamentals. What has happened is there was a discount of the fear premium. People were afraid, so there was a fear premium. If the true value of the naira is N202 per dollar before now, the fear premium took it to N225. Today, the fear problem has been removed but the fundamental is still there, the naira value is still there and what it means is that now the naira is overvalued and in due time, it will correct itself. I do not believe it will go back to N225, but it may go back to N215 per dollar.
