Nigeria’s central bank is preparing to weaken its naira and abandon a currency peg that has starved Africa’s biggest economy of dollars and slowed foreign investment to a trickle. Naira forward contracts soared to record highs as traders added to bets on a weaker currency.
In a retreat for President Muhammadu Buhari, who has resisted calls to let the currency weaken, Central Bank of Nigeria Governor Godwin Emefiele said the Abuja-based bank would release details of a “flexible” exchange-rate framework “in the coming days.”
The central bank will probably introduce a dual-rate system, with the naira trading at a market-related level, while the bank continues to make foreign-currency available to some importers at a stronger fixed rate, according to Renaissance Capital Ltd. The bank has pegged the local unit at 197-199 per dollar since March 2015, deepening an economic slump caused by the plunge in oil prices.
“It looks like the most investors could have hoped for from the CBN,” Charles Robertson, the London-based chief economist at Renaissance, said by phone. “If my interpretation’s right, they’re not going to throw away their reserves trying to manage the exchange rate and they’ll let the market determine that exchange rate.”
Three-month naira non-deliverable forwards rose 16 percent to a record 288 against the dollar in London, pricing in a devaluation of 45 percent in that period. Six-month NDFs jumped 9.9 percent to 300 and one-year contracts climbed 4.2 percent to 320, also a record. “It is a technical devaluation,” Ayodeji Ebo, head of research at Afrinvest West Africa Ltd., said by phone from Lagos. “The objective is clear. It will open up the foreign-exchange market.” The central bank would make dollars available to companies importing “critical” materials.
, while others would have to buy foreign currency in the market, Emefiele said. Details of how the new system will operate have yet to be determined, he said.
“They’ll allocate dollars to those key sectors that will help Nigeria change the structure of its economy, probably agribusiness, industry and oil refineries,” Robertson said. “It sounds like the right policy stance to get Nigeria working again, although they’ll be an inevitable lag as devaluation always carries some short-term pain.”