Nigeria buckles on naira but holds fire on rates

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Nigeria’s central bank on Wednesday finally buckled to market pressure to devalue the naira after months of foreign exchange shortages and economic contraction resulting from the collapse in oil prices and a strict rationing of foreign currency.

The central bank said it would from Monday allow a “market-driven” rate on the interbank market in what it called “a transition to a market-based system”, writes David Pilling.

Godwin Emefiele, the central bank governor, said the bank would “periodically intervene” in the market to buy or sell, but did not mention a level at which the currency would be defended. He added that a new category of licensed “principal dealers” would be suspended from trading if they allowed the new system to be “undermined by speculators and rent-seekers”.

Economists said they were unsure how far the naira would fall when the new system comes into effect next week, although forward markets suggest a drop of as much as 30 per cent to around NGN280 to the dollar.

Although there will still be restrictions on who can get foreign exchange, the announcement appears to herald a more rapid move to a fully flexible exchange rate than many had envisaged. There was, however, no mention of an accompanying rise in interest rates, thought necessary by many analysts as a way of attracting foreign inflows. Nigeria has official reserves of $26.5bn, only about five months of imports, though analysts estimate that the real figure, net of borrowing, may be as little as $21bn.

The government of Muhammadu Buhari had consistently refused to budge from the official exchange rate of NGN197 to the dollar, arguing that to do so would stoke inflation, already above 15 per cent, through a higher cost of imports. Instead, it rationed foreign currency to so-called strategic industries, bringing other businesses that could not access foreign currency to a standstill or driving them to the flourishing black market where the naira has regularly traded at above NGN350 to the dollar.

Razia Khan, chief economist for Africa at Standard Chartered Bank, said Nigeria had boxed itself in by leaving the devaluation too late. That had left a backlog of between $6bn-$9bn of unsatisfied foreign exchange requirements, which would be impossible to fulfil in one go without reducing foreign reserves to dangerous levels, she said.

The change of heart on foreign exchange policy had, she said, been precipitated by a realisation that something had to be done to rescue an economy that contracted in the first quarter and could be heading for a yet-steeper downturn.

Nigeria relies on oil for more than 90 per cent of foreign revenues. With oil prices at their current levels, the country faces its worst economic crisis in more than 15 years.