President hints at devaluation in recent speech; move could help restart the economy, experts say
LAGOS, Nigeria – Nigeria appears to officially devalue the naira in the first quarter of next year, financial experts told Anadolu Agency on Friday.
The value of the Nigerian currency continues to fall in the parallel market, pressured lower by the drop in oil prices, and the Nigerian government’s restrictions on foreign exchange.
Should devaluation take place, it would be the third time the country had devalued the naira in less than two years.
Nigeria’s President Muhammadu Buhari said in his budget speech last Tuesday that the central bank would soon make some pronouncements on monetary policy.
“I am assured by the Governor of central bank that the bank is currently fine-tuning its foreign exchange management to introduce some flexibility and encourage additional inflow of foreign currency to help ease the pressure [on the naira],” the president said.
Experts interpreted this as a hint of upcoming devaluation.
“Yes, devaluation is imminent and it might happen as early as the first quarter of 2016. It is obvious from the president’s address that the Central Bank of Nigeria (CBN) is working on a new framework for foreign exchange as the money market had declined by over N400 billion ($2 billion) since the CBN issued limitations on foreign exchange sales,” Ola Belgore, managing director at Afrinvest Asset Management Limited, told Anadolu Agency.
The money market in Nigeria allows banks to trade in short-term instruments. The central bank intervenes on the money market as part of monetary policy.
Nigeria had last year in November adjusted the value of the currency to an official exchange rate at 168 to a dollar, up from 155 to the American currency. Again, in February 2015, the naira exchange rate was increased to 197 to a dollarange rate. But the value of the currency hovers between 250 and 270 to a dollar at the parallel market, with many financial experts saying the current official rate is “unrealistic.”
“The band could be between 230-250 which was the level the market was trading more than three weeks ago,” Belgore predicted.
Atiku Samuel, lead analyst at BudgIT, a public spending watchdog group, also took the president’s hint at meaning a devaluation is imminent.
“Yes, flexibility sounds like a flexible exchange regime,” Samuel told Anadolu Agency, adding however that the 2016 budget was prepared on the basis of the naira worth 197 to the dollar.
“I think the president is only trying to calm nerves before the big announcement sometime in 2016, he said.
Belgore said that devaluation might help the economy.
“Devaluation won’t solve the whole problem, in fact it may lead to increased inflation,” he stated.
“But it would go a long way in boosting government oil revenue, and could attract some portfolio capital that could marginally ease the foreign exchange burden of the CBN. Business conditions would also improve if the devaluation is accompanied with relaxation of rules on access to foreign exchange, which may not completely happen.”
The central bank started restricting currency trading in December 2014, in an effort to stem the fall of the naira in the wake of falling oil prices. In June, the central bank banned importers of about 40 items including toothpicks, private jets and wheelbarrows from using official foreign-exchange markets.