Nigeria to stop defending naira

Abuja, Nigeria | AFP |

Nigeria signalled Wednesday it will ease currency controls, opening the door to a plunge in the value of the naira, after the restrictions were blamed for stifling the economy.

Central Bank of Nigeria (CBN) governor Godwin Emefiele said in a televised speech from Abuja that the currency market will be “purely market driven” when the move comes into effect June 20.

“We now believe that the time is right” to reintroduce the “flexible interbank exchange rate market”, he said.

The move is a reversal of policy for President Muhammadu Buhari, who swore he would not “kill the naira” by letting it fall in value, unlike other oil exporters such as Angola to Russia that let their currencies slide in the wake of plunging global crude prices.

The peg of the naira at 197-199 to the dollar helped limit inflation, but Nigeria quickly ran down its foreign currency reserves as oil exports brought in less dollars.

Limits on access to dollars stifled the economy as it choked off imports, including petrol, with shortages and a hike in pump prices sparking widespread discontent.

Nigeria’s economy contracted in the first quarter of this year and Emefiele warned last month that recession was “imminent”.

Analysts welcomed the announcement, predicting the policy change will attract much-needed foreign investment to the cash-strapped country.

Buhari’s macroeconomic policies had scared investors, dragging foreign direct investment to its lowest levels since the 2007-08 global financial crisis, according to Bloomberg.

“After many false dawns, this looks like quite a bold step in the right direction,” Alan Cameron, an economist at London-based Exotix, told AFP.

“It will be the difference between investing and not investing. I think that will bring a whole new level of certainty to the investment decision.”

Wait and see

The new currency flexibility appeared “positive” said Standard Chartered Bank economist Razia Khan but warned the new policy can only be assessed once it is put in place.

“We will see when the system is operational,” she added. “We’re waiting for the guidelines to be published.”

Emefiele said “the foreign exchange rate will be purely market driven” under the new system and that “the central bank is strongly determined to make this market as transparent, liquid and efficient as possible”.

The dollar shortage had forced black market rates to as low as 370 naira to the dollar on Wednesday.

While prices of imported goods are likely to shoot higher, shortages are likely to ease and a flexible exchange rate will likely help revive investment.

It will also ease pressure on Nigeria’s foreign reserves, which dwindled to about $26.7 billion on June 10 from $42.8 billion in January 2014.

A recent recovery in global oil prices has not been much help to Nigeria’s government, which gets 70 percent of its revenue sales from oil exports.

While global oil prices have rebounded to around $50 per barrel, nearly double the low point touched in January, militant attacks on infrastructure has hit the nation’s production.