After months of dithering, Nigeriaâs Central Bank will allow the national currencyâs value be determined by market forces after removing pegs which tied it to a fixed figure. The new policy will take effect from June 20 and will effectively devalue the naira.
The naira was officially pegged at around 199 naira to $1 but as the economy tanked and foreign reserves dried up, the Central Bank allowed few local businesses or individuals access to dollars at that rate. On the more commonly used parallel markets it traded around 350 naira to $1, which many believe is a fairer reflection of its value. It is a departure from the Central Bankâs former position as the sole dealer and means the naira will now be traded through the Central Bankâs selected primary dealers.
The policy change has been largely welcomed. It follows months of fuel shortages, record inflation and investor withdrawalâoccasioned by a stubborn refusal to devalue the currency in the face of dipping revenues as a result of the sharp drop in the price of oil, the countryâs main resource. Manji Cheto, senior vice president at London-based Teneo Intelligence says the Central Bankâs change of tack âis a clear admission that its earlier policies had failed.â
The Central Bankâs refusal to devalue the naira reflected the position of Nigeriaâs president, Muhammadu Buhari. He has said a devaluation was tantamount to âkilling the nairaâ. Even though the Central Bank is supposed to operate independently of government the presidentâs stated position is believed to have influenced the Central Bank. The administrationâs refusal to devalue, despite pleas from international and local economists, triggered investor caution in light of the countryâs strict monetary policies.
The apex bank says it will periodically intervene in the market, stating conditions under which this could happen in its new guidelines on trading foreign exchange. But Cheto says the possibility of an intervention means the new policy can only be described as a âmanaged float.â
The Central Bank expects its new policy to close the gap in the current dual exchange rates possibly merging the pegged rate of the naira and its value on the parallel market where it has typically traded around 50% higher for most of the year. âWeâre talking about an open, transparent two-way system,â Godwin Emefiele, Central Bank governor said at a press conference. âItâs intended we donât have speculators and rent-seekers. I donât expect that any other exchange rate will be recognized.â