Nigeria’s central bank made a significant move by allowing the naira currency to fall by up to 36% on the official market. This decision comes shortly after the suspension of Godwin Emefiele, the central bank governor in charge of overseeing the highly criticised multiple exchange rate system.
Nigeria has struggled with foreign currency shortages for decades due to the existence of multiple exchange rates. These shortages worsened under Emefiele’s leadership, making it increasingly difficult for investors to withdraw funds from the country’s largest economy.
Traders told Reuters that the central bank had lifted trading restrictions on the official market, causing the naira to fall to an all-time low of 750 naira to the dollar, down from 477 naira to the dollar the previous day.
This is the first significant depreciation of the naira on the official market since 2016, prior to the implementation of a managed exchange rate in 2017. The new official rate now corresponds to the black market rate, which has been hovering around 750 naira to the dollar for the past year.
Charlie Robertson, head of macro strategy at FIM Partners, commented on the devaluation, saying, “A much-needed devaluation that takes the currency from 50% overvalued to about 5-10% cheaper.” This should help the current account and the investment climate in the long run.” The central bank has yet to make an official statement on the devaluation.
President Bola Tinubu, who took over an underperforming economy burdened by high debt and declining oil output, has promised to revitalise Nigeria’s economy. Although he acknowledges that certain decisions, such as the elimination of popular petrol subsidies, may impose additional burdens on citizens, he believes they will free up resources for education, reliable power supply, transportation infrastructure, and healthcare.
Foreign investors have long identified currency restrictions as a major barrier to financing in Nigeria, Africa’s largest oil producer. Tinubu’s first priorities after taking office were to unify the exchange rate and eliminate subsidies. Investors and economists have reacted favourably to his swift implementation of these measures within the first two weeks of his presidency.
Bismarck Rewane, CEO of Financial Derivatives Company, expressed optimism, saying, “What we are seeing is the removal of distortions created by inefficient pricing of foreign exchange, and in the next few weeks, we should start seeing the naira finding its level.
According to Tradeweb data, the news of the devaluation caused a surge in Nigeria’s sovereign dollar bonds, with prices rising by as much as 2.7 cents on the dollar, particularly for longer-dated maturities. In addition, following Emefiele’s suspension, the local banking index increased by 23%, reaching levels not seen in over 20 years.
Main Image: Ripples Nigeria