The Nigerian government must devalue the naira over the next year if it wants to improve the performance of its stock market. Nigeria has tight controls on its currency, which maintain its value but are harming stock market performance.
Nigeria has one of the worst performing stock markets in the world. International investors have been reluctant to invest in the country’s struggling economy and international agencies, including ratings agency S&P, believe the naira must be devalued to encourage investment.
The Nigerian economy is heavily dependent on oil, which makes up 95 percent of foreign earnings. The fall in the price of oil has hit Nigeria hard. The country restricts access to U.S. dollars and has strict protections on its currency. The government also has tight restrictions on imports. All these policies have contributed to an apparent over-valuation of the naira and a reluctance to invest from outside the large African nation.
Nigeria’s stock market has been dropping in value for days with investors jittery about a potential devaluation. In March last year, Nigeria introduced measures to prevent capital flight from the country but its approach has been compared to the flawed foreign exchange policies of Venezuela and the abandoned Chinese policy on stock trading.
The devaluation of the naira is expected to take place in graduated steps throughout the year as a sudden, harsh re-valuation could cause further economic instability. If Nigeria’s government maintains its current fiscal approach, international investors are warning the country’s stock market will continue to fall, as it has done for the last eight days.
