The Global X MSCI Nigeria exchange-traded fund (NGE) is down more than 1% at the open after Nigeria’s central bank cut a key interest rate in a surprise move.

Investors have already run for the exit: the Nigeria ETF is down 30% this year. Nigeria recently named a new cabinet, six months after Muhammadu Buhari became president following a delayed election process. The country is starved of oil revenue, its main export, and is battling the Muslim terrorist group Boko Haram. Capital Economics Africa Economist John Ashbourne writes that the central bank seems to see slow growth, not the slow-burning balance of payments crisis, as Nigeria’s key economic challenge. He adds:

The central bank’s “increasingly unorthodox policy-making is likely to worry already-skittish foreign investors and could precipitate even more severe strains in the balance of payments. The Central Bank of Nigeria (CBN) has substantially loosened monetary policy, cutting its key policy rate from 13.0% to 11.0% and the Cash Reserve Requirement from 25% to 20%. We were among the majority of economists polled by Bloomberg who had expected rates to remain on hold. Even the seven analysts who did predict a cut had only anticipated that rates would fall to 12.0%.

It is difficult to overstate the degree to which this is a highly unorthodox move. Nigeria faces high inflation, pressure on its currency, and it desperately needs to attract foreign capital to fund the current account deficit created by low oil prices. It is, in short, in exactly the sort of situation in which economists would generally expect – and recommend – tighter monetary policy. Faced with broadly similar situations, central banks in Ghana, Angola, Kenya, Mozambique, Zambia, and South Africa have all hiked rates …

Moves that discourage capital inflows are particularly worrying given Nigeria’s current account deficit. Falling oil exports have left the import-hungry country with a current account deficit or around 2% of GDP, or US $12 billion. The CBN’s efforts to hold the naira stable have prevented imports from falling sharply, so Nigeria must either attract capital flows equal to this sum or burn through almost half of its foreign reserves, which amount to just US $30 billion. It is far from clear whether this is possible, raising the very real chance of a damaging balance of payments crisis.”


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