NIGERIA’S central bank said it will allow the naira exchange rate to be market-driven, setting the stage for a devaluation of the currency when the new system comes into effect June 20.
The Central Bank of Nigeria will select a group of around 10 primary dealers through which the naira will be traded. There will only be one exchange rate and the bank will intervene in the market “as the need arises,” Governor Godwin Emefiele told reporters in Abuja, the capital, Wednesday.
“We’re talking about an open, transparent two-way system,” Emefiele said. “It’s intended we don’t have speculators and rent-seekers. I don’t expect that any other exchange rate will be recognised.”
Three-month non-deliverable naira forward contracts surged as much as 9.5% to a record 333 per dollar after the announcement, suggesting traders expect the currency to trade around that level in the market, compared with the current official rate of 199.
Nigeria’s 2023 dollar bonds gained most since 2014, with the yield falling 55 basis points to 7.1%, and stocks surged 3.1%. “It’s probably the best that the markets could have hoped for,” Ridle Markus, a Johannesburg-based analyst at Barclays’ Africa unit, said by phone. “It certainly seems like it will be a normal, free-floating currency. That would be positive.”
Emefiele has faced calls for more than a year to devalue the currency, as other oil exporters from Russia to Kazakhstan and Angola have done, amid a rout in crude prices since mid-2014 to around $50 a barrel.
Investment into Nigeria has shriveled as foreigners are put off by capital controls needed to defend the currency’s peg of 197-199 per dollar, while local businesses have struggled to import raw materials and equipment.
Emefiele said last month the central bank would implement a “flexible” exchange-rate policy to help alleviate a dollar shortage that has strangled the economy.
Gross domestic product contracted in the three months through March for the first time since 2004 and inflation accelerated to 15.6% in May, the highest rate in more than six years. “It is something the market will want to see in operation to fully be able to take decisions concerning future investment, especially foreign investors,” Kunle Ezun, an analyst at Ecobank Transnational Inc., said by phone from Lagos. “The takeaway is that the central bank has not committed to any exchange rate.”
The naira will probably trade in a range of 280 to 350 against the dollar after the central bank implements its decision, analysts at Johannesburg-based Rand Merchant Bank said in a note on Wednesday before the announcement.