The Central Bank of Nigeria has weakened the naira, responding to mounting pressure from external lenders, US dollar shortages and a slump in oil prices that has blown a hole in the country’s budget.
Traders said that the central bank requested dealers to submit official bids at 380 to the dollar on Friday last week, according to Reuters. The naira closed at 381 to the dollar on Tuesday, down about 5.5 per cent from the previous official rate of 360.
Nigeria last cut the value of its currency during the height of global market volatility in March, when the price of oil, the country’s key export, collapsed. Up to that point, the exchange rate had held at around 307 for more than three years.
Still, the naira trades at over 450 to the dollar on the black market, and analysts said it could still slide further. Goldman Sachs analysts last week noted “high and sticky” inflation in the country, with persistent outflows from official reserves. A rate of 500 naira to the dollar in 12 months’ time was a “reasonable target”, the bank said.
The large gap between official and informal rates for the naira is a sign of intensifying shortages of foreign exchange, said Cobus de Hart, economist at NKC African Economics, in a note on Tuesday.
He said that while a devaluation of the official rate would provide “a boost to fiscal revenues” while “possibly sending a positive signal to lenders”, it would not in itself “do much to curb FX pressures”.
The central bank did not respond to a request for comment.
Nigeria’s economy had barely recovered from a slump brought on by the 2014-15 oil price collapse when coronavirus hit. Oil accounts for around half of federal revenues and nearly all of the country’s foreign exchange, so plunging oil prices combined with lockdowns to control the virus outbreak hit the economy hard. The crisis threatens to tip Nigeria into its deepest recession for decades.
Win Thin, head of currency strategy at Brown Brothers Harriman, said that this week’s move “really has little practical impact”. He added: “With oil prices stalling out at levels well below where they started the year, the outlook for the Nigerian economy remains poor.”
Africa’s most populous nation has long maintained several exchange rates. In addition to the interbank and black-market rates, there are official rates for consumers wanting dollars for school and medical fees abroad, for Muslims making the pilgrimage to Saudi Arabia, and for people wishing to buy hard currency at exchange bureaux.
But analysts and economists have long argued that a single rate would help to provide clarity and attract much-needed foreign investment.
Central bank governor Godwin Emefiele said last month that the bank would unify rates after the IMF in April approved Nigeria’s request for $3.4bn in emergency funding, while saying that unification of rates “should be expedited”.
The recent devaluation is “a step in the right direction,” said Temi Popoola, head of Nigeria at Renaissance Capital in Lagos. He added that “more needs to be done”, including allowing the naira to move to a more market-driven level.
Additional reporting by Eva Szalay in London