Middle class Nigerians to hold more Ghanaian Cedis



November 01, 2011 / Damina Advisors


Nigeria ‘Week-Ahead’ (Nov 1 -7, 2011):
Planned 3%-5% devaluation of Naira to pile pressure on neighboring CFA Franc, Ghanaian Cedi and alter regional trade dynamics

Nigeria’s central bank governor Lamido Sanusi has confirmed that he intends to undertake a managed 3%-5% devaluation of the country’s currency, the Naira, in 2012 as set forth in the country’s medium-term budget framework.


The central bank has, over the past few years, kept the official Naira-USD rate in a managed fixed rate of 150 Naira to 1USD. However, the country’s parallel black market has always implied a lower Naira value and, in recent weeks, has exchanged US dollars for up to 162 Naira.


With the planned devaluation, the central bank will be yielding to economic reality and bringing the official and unofficial exchange rates into closer proximity.


In his announcement, Sanusi made several other assumptions and implications not only for Nigeria, but for the wider West African region.


Firstly, Sanusi’s announcement implies that despite the bullish assumptions contained in the 2012 budget framework, Nigeria actually expects oil receipts in 2012 to fall in tandem with a fall in global oil prices.


The published $75/ barrel of oil for 2012 contained in the country’s medium-term budget framework may be more ambitious than the finance ministry would care to admit.


The central bank seems decidedly less bullish on oil prices than the finance ministry. Fearing a loss of FX reserves to defend the unsustainable 150/ 1USD exchange rate, Sanusi is pre-emptively seeking to devalue the currency ahead of any major falls in oil prices – the country’s predominant export.


Other likely effects of the pending devaluation will be that middle class Nigerians will seek to hold more Ghanaian Cedis (the currency of the country where many send their kids to school and own homes), as well as CFA Francs (which are used widely throughout West Africa for commercial activities).


Demand for US dollars and UK Pounds may also surge.


The increase in the value of the CFA and Ghanaian Cedi will naturally reduce exports from the CFA zone and Ghana into Nigeria and reverse some trade patterns within West Africa.


All of the landlocked West African countries such as Burkina Faso, Mali, Niger and Chad route a majority of their imports through coastal neighbors, Cote d’Ivoire, Ghana or Nigeria.


With the CFA pegged to the Euro (a currency that is itself in serious structural crisis), the Ghanaian Cedi may be left to bear the brunt of the appreciation on the flip side of the Naira devaluation – causing headaches for Ghanaian monetary authorities, raising the price of goods and services in Ghana and probably spiking the number of labor strikes in Ghana.


Already in the past month, doctors, graduate teachers and pharmacists in Ghana have embarked on labor strikes. This trend is likely to get worse as the Cedi appreciates against not only the USD and Euro, but also against the Naira and CFA in coming weeks and months.


Ghana’s struggling manufacturing sector will further contract even as the stronger Cedi reduces the real cost of imports ahead of the critical Christmas shopping season.


Ghana’s central bank, already coping with the surge of oil revenue inflows and falling inflation, will likely have to reduce interest rates future over the coming months and quarters if it is to adequately sterilize the effects of the devaluation of the Naira and the ongoing depreciation of the Euro-CFA on the appreciating Ghanaian cedi.




For additional information – send an e-mail to nicole@daminaadvisors.com




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