The impact of FOREX tightening on the economy and on global businesses: A focus on Nigeria and Zimbabwe

Posted in Oil and gas Southern Africa Western Africa

Since gaining independence from Great Britain in 1960, Nigeria, one of the ‘MINT’ economies, is often hailed as the emerging market to watch during the 21st century. Nigeria is now the world’s 24th largest economy by GDP and is on track to reach the top 20 by 2020. However, political issues have meant that country is still often viewed as risky for foreign investors and businesses. The country is still perceived as being ‘fantastically corrupt’, and there is still a widespread distrust of governmental influence. Nevertheless, given the GDP re-adjustment earlier this decade, Nigeria is now officially Africa’s largest economy, and there are reasons for those with operations in the country to look up.

Zimbabwe, on the other hand, was riddled with significant hyperinflation in the latter half of the 20th century and the early part of the 21st century and for a while it looked as if the country would not recover. A thorny political climate merely delayed the process. Notwithstanding Zimbabwe’s history, the recent strides made in the country’s energy sphere and, most importantly, the readiness of those analysing Zimbabwe to compartmentalise their perceptions of the government and their perceptions of the country itself, has left Zimbabwe a far more attractive economy of late.

The economies of both Nigeria and Zimbabwe this year have suffered from falls in FOREX reserves and a decrease in the depth of the US dollar (‘USD’) reserves within the respective countries in particular. As import-dependent countries, this reduction has left both countries facing recession. It is likely to be the cause of what is said to be Nigeria’s worst economic downturn in decades, following the 0.36% GDP contraction that occurred in Q1 2016.

USD Forex Falls in Nigeria

As of 24 May 2016, Nigeria’s naira was officially fixed by the Central Bank of Nigeria (‘CBN’) at N197 to the USD (Source: CBN Website). With the USD actually costing Nigerian banks around N285 on the interbank market, the recent USD shortages have ensured that the official exchange rate is little more than notional. Many of the wider Nigerian public have felt no choice but to resort to spending at least N300 on the sizeable parallel black market to circumvent the consequential FOREX tightening by the government who have implemented restrictions on the sale of USD to the Nigerian public.

The exact cause of the fall in the level of FOREX reserves in Nigeria is not clear, although the recent increases in the re-exportation of remittances from the country may have played a part. Liberal credit limits on USD-denominated personal credit cards has had the effect of further isolating access to USD for the majority of Nigerians. Recent increases in net USD imports may also have contributed to the fall in reserves, given the corresponding increase in demand for USD that would have followed.

Oil Crisis

What is clear however, is the consequence that this fall in the level of these reserves has had on the Nigerian economy; most notably on the oil industry within the country. An inability to import enough oil to meet demand has plunged the economy into an oil crisis and has left the government with little choice but to increase the naira price of petrol. This petrol price increase has led to strikes and even to violence.

The necessity for this price change is demonstrated on the supply and demand curve below, which takes into account the price inelasticity of petrol, both in its commodity form and its form when sold to consumers.


FOREX tightening has also made it more difficult for domestic airlines to import the widely used ‘Jet-A1’ aviation fuel, which they tend to import from the US. The fuel supply falls have naturally increased the cost of aviation fuel. It appears that Nigerian consumers are due to swallow this cost by way of increased domestic airline flight prices.

It is unlikely that international airlines operating in Nigeria will struggle in the same way. These airlines have alternative sources available to them to obtain aviation fuel. The FOREX tightening will undoubtedly act as a hindrance to Nigerian-based asset finance deals funded by USD-denominated facilities for these airlines, although the impact may be more limited.

Solutions for the naira

There has been some talk of devaluating the Nigerian currency in order to restore equilibrium. With Nigeria being a net importer, it is likely that this would simply make the situation worse and the exchange rate increase would cause imports to become more costly. It must be noted that a devaluation coupled with an increase in the quantity of exports to the point at which Nigeria became a net exporter would only have positive benefits for the economy. The price of Nigerian exports would fall; increasing competition and contributing positively to GDP. If Nigeria were to switch the focus to constructing enough oil refineries to produce a sufficient quantity of domestically produced petrol to make Nigeria petrol-self-sustainable, there would be no need for Nigeria to export crude oil, only to later re-import the refined form of the same product, as is currently the case.

As it stands, the solution that the Nigerian government have proposed to the FOREX issue is to adopt a ‘flexible FOREX policy’ whereby the government will undertake to officially institute, incorporate and recognise the black market, rather than allowing two parallel exchange markets to run. This would allow the government to better regulate the use of the limited foreign USD reserves, and undoubtedly provide a more suitable short-term solution than devaluation would.


In Zimbabwe’s case, consistent devaluation in the past left the country experiencing severe hyperinflation, to the point at which their currency became worthless. For this reason, in 2009, the Zimbabwe government effectively scrapped the local currency; suspending the Zimbabwe dollar and officially introducing a basket of foreign currencies as legal tender which include both the South African Rand and the USD. Of these currencies, the USD is understood to be used in around 95% of transactions.

As a result, a fall in the level of FOREX reserves of USD within Zimbabwe has posed problems for the country, not simply for the use of funding imports as in the case of Nigeria, but for the purposes of funding domestic transactions.

The solution proposed by the Zimbabwean government to introduce ‘bond notes’ in lieu of issuing further USD has been met by some opposition. Some critics view the proposition as little more than re-introducing local currency via the back door, which is likely to simply reintroduce the exchange rate issues that Zimbabwe faced prior to 2009. An alternative solution proposed has been to encourage a shift in preference from the US dollar to the South African rand. Given the strength of the trade relations between Zimbabwe and South Africa, with South Africa accounting for 70% of the Zimbabwe’s trade, this could prove to be beneficial for both economies and for improving the strength and perceptions of another African currency.

What this means for global businesses

It is no surprise that many deals conducted in Nigeria and Zimbabwe are still funded using USD-denominated facilities, given the ubiquity and the strength of that currency. In Nigeria, the deals that are denominated in a mixture of USD and naira will always be weighted heavily in favour of the dollar; in Zimbabwe, facilities may be denominated in a mixture of USD and other currencies that form part of the basket of currencies available in the country. Global businesses operating in the areas should consider the potential benefits of using these alternative currencies to fund deals, not least for the strength of those currencies. Helping to strengthen these currencies as against the US dollar will offset the downwards exchange rate trends, and making their use the expectation when conducting deals in these countries will undoubtedly taper fluctuations and make the currencies appear more attractive.

 The Inside Africa team would like to thank Ligali Ajibola Ayorinde, Trainee Solicitor and author.



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