daniel chigunwe
Nigeria has abandoned its years-long currency peg and allowed the naira to trade freely, traders and local bankers said, prompting the biggest single-day fall in its history.
The about-turn, which has not been confirmed by the central bank, would mark the latest in a series of eye-catching moves since new president Bola Tinubu took office last month. Markets anticipated a possible end to Nigeria’s complex exchange rate system when Tinubu on Friday removed central bank chief Godwin Emefiele, whose signature policy was to prop up the naira.
The country’s official exchange rate dropped to N600 against the dollar on Wednesday according to data from Refinitiv, a fall of 23 percent from a day earlier and the biggest single-session drop since 2016.
But traders said the real fall was even more marked, with the naira actually changing hands at local banks at about N750 to the dollar, a 40 percent fall, the biggest drop in its history and roughly in line with the parallel rate used by ordinary Nigerians. Local media reported that traders were told by the central bank to trade the currency freely.
Abandoning the currency peg would end years of foreign exchange rationing and encourage an inflow of portfolio and direct investment into Nigeria, according to investors and economists. Jason Tuvey, emerging markets economist at Capital Economics, said if the naira were allowed to float freely, foreign investors would come back after being absent for many years.
“In the near term it will be portfolio investors [who return] but we could see foreign direct investment coming in as well,” he said.
It would end years of complex foreign exchange management that allowed well-connected business and individuals in Nigeria to access US currency at subsidised rates. The multiple-window regime was designed to provide dollars needed for essential imports but left many starved of hard currency.
Most of Nigeria’s economy operated at the parallel rate, where dollars were typically as much as 40 percent more expensive.
This regime hit foreign investors, who have struggled to exchange naira revenues or dividends for dollars.
“The difficulty of getting your money out inhibits putting your money in,” said Tope Lawani, managing partner of Helios Investment Partners, an Africa-focused investment firm. It had not invested in Nigeria for at least six years because of this, he added.
Abandoning the currency regime would be “a hugely positive move,” said Patrick Curran of Tellimer, an emerging market research company, adding that the issue “has been one of the biggest obstacles in Nigeria”.
Charlie Robertson, head of macro strategy at FIM Partners, an asset management firm, said a devaluation would not necessarily lead to a surge in prices, as most of the economy already operated at the parallel rate.
“We could almost see some disinflationary effect,” he said.
A free-floating currency would mark another sharp change of direction towards economic orthodoxy after eight years of interventionism under former president Muhammadu Buhari.
Tinubu has already moved to eliminate popular, but costly fuel subsidies that swallowed US$10 billion of state revenues last year. Petrol prices in Nigeria have since risen sharply.
Adedayo Ademuwagun, a consultant at Songhai Advisory, said the new government’s next move should be to appoint a new central bank chief and outline a credible plan to turn round the economy.
“If not, the economy remains vulnerable to shocks that derailed previous attempts to float the currency,” Ademuwagun said.
Folashodun Adebisi Shonubi, one of Emefiele’s deputies, is in temporary charge at the central bank.
Foreign airlines were among the hardest hit by Nigeria’s dollar shortages.
The International Air Transport Association said at its annual conference this month that carriers had US$812 million stuck in Nigeria, more than any other country and almost half of the total worldwide. — Financial Times
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