The remarkable reduction in the price of oil has led the Central Bank of Nigeria (CBN) to devalue the naira by 8% against the US dollar and raise interest rates. The Ghanaian cedi has taken a much larger hit this year. Both currencies should stabilise and the Cedi has firmed up with a Eurobond issue and cocoa loan inflows. Nevertheless it’s clear that in monetary terms, Ghana and Nigeria now find themselves in different places from the beginning of the year. Most forecasts see oil staying at current low prices for a large proportion of 2015.
What does this mean for competitiveness and growth? Looking at the regional perspective, the 8 WAEMU countries using the CFA franc as well as Cape Verde should also experience currency depreciation at some stage in the spring of 2015, offsetting any major gains in competitiveness for Ghana and Nigeria. The tumble in oil prices is likely to further reduce anaemic inflation in the Eurozone, and the European Central Bank will need to act – by printing money. The euro will weaken against the dollar, automatically pushing down the CFA and the Cape Verdean escudo as well.
Marginal effects within the region by mid-2015, but what about West Africa’s terms of trade with the rest of the World? A durable decrease in the price of oil is a source of concern all round. Oil is no longer an exclusively Nigerian or even Ghanaian bonanza. From Freetown to Niamey, oil revenues have been penned in to macro-economic and budget scenarios.
Devaluation should offset some of the loss in expenditure, but it’s clear a finely tuned and targeted approach to import substitution will be required in many countries, most notably Nigeria. Increased import prices present a clear opportunity for local manufacturers. Jonathan Nicol of the Shippers’ Association of Lagos State sees imports reduced by 3-5% on current exchange rates. Nevertheless, critical imports such as productive capital or selected raw materials should be stripped of import duty fairly rapidly to avoid increased costs for intermediary goods hitting local manufacturers and consumers’ purchasing power. The potential for significant import substitution is a clear opportunity for the region, but it involves trimming government revenue collection in the short term…