Nigeria’s central bank will migrate to a single exchange rate for the naira by collapsing the multiple exchange rate policy that determined the value for the local currency, people with direct knowledge of the matter said.
It was forced to move after the global coronavirus pandemic more than halved oil prices, raising pressure on the currencies of crude-dependent economies like Nigeria, Africa’s largest producer of the commodity.
The Abuja-based central bank weakened the official exchange rate on its website by 15% to 360 naira per dollar from 307 naira. The rate for foreign portfolio investors was also altered, to 380 naira per dollar from 366 naira.
The policy maker’s merging of the official rate, the rate for investors and exporters and rate for foreign-exchange bureaus are the first steps among others, according to the people, who asked not to be identified because they are not authorized to speak publicly about the matter.
Nigeria’s system of multiple exchange rates aimed to control demand for dollars following the collapse of oil prices in 2014. The official rate supplies cheap foreign exchange to government departments and select companies, including fuel importers. After its last devaluation in 2017, the central bank created an investors and exporters window, which allowed for some movement, but was closely managed by the regulator.
The naira has come under tremendous pressure since oil prices slumped to around $30 a barrel, below the government’s $57 target. Earnings from sales of crude account for 90% of foreign-exchange earnings and more than half of government income.
A weaker official rate will give a big boost to the revenues of the federal government and states by allowing dollar earnings from oil to be converted to naira at a higher rate. It will also, however, increase the value of the government’s foreign liabilities in local currency.
Changes to the exchange regime were welcomed by analysts and investors, but they may not be enough to ease pressure on the naira just yet.
“We may likely see another shift,” Ayodeji Ebo, managing director at Afrinvest Securities in Lagos said by phone. “We are looking at 400 naira to a dollar, but this is a good beginning.”
The inefficiencies and complexity of Nigeria’s exchange rate system made it prone to corruption, said John Ashbourne, an economist at Capital Economics.
“Hopefully the transition to a more simple, flexible rate is the first step in unpicking the trade-destroying policies that have held back growth in recent years,” Ashbourne said.