Nigeria’s naira plunged to a record against the dollar following a revision of the methodology used to set the exchange rate, in effect the second devaluation of the currency in seven months.
Nigeria has sharply devalued its currency for the second time in eight months, as the west African country bids to clear up its messy system of exchange rates and attract investment to its flailing economy.The naira has tumbled this week after the methodology used
to calculate the official exchange rate was changed, taking the currency closer
to the black market rate.
The move is widely seen as part of market-friendly reforms
being introduced by Bola Tinubu, who became president last May and who shortly
afterwards jettisoned the years-long peg instituted by the former central bank
chief that had kept the currency artificially high.
However, the country still kept an official rate that was
well above the freely-traded rate, which made it more expensive for
multinational companies wanting to invest in Nigeria.
Charlie Robertson, head of macro strategy at asset
management firm FIM Partners, said the new methodology could help Nigeria
attract more investment as it essentially abolishes the multiple exchange rates
that frustrated investors.
“It could take months but there could be more dollars
swirling around in Nigeria now that the currency is officially very cheap,”
Robertson said.
FMDQ Group, which calculates the country’s official exchange
rate, announced on Friday that it was revising its methodology to “address
recent fluctuations and challenges encountered” in Nigeria’s highly volatile
foreign exchange market, where the official exchange rate often trailed
parallel market values. The publication of exchange rates was suspended that
day.
The revised exchange rate system, which FMDQ began
publishing this week, will ensure that “rates accurately reflect market
conditions while upholding price formation and transparency”, the firm said.
The currency fell by nearly 40 per cent to 1482.57 to the
dollar on the official market on Tuesday and slipped as low as 1,531 on
Wednesday, according to FMDQ. That took the naira past N1,475 to the dollar it
is trading at on the black market, according to one trader.
Nigeria’s central bank on Monday took aim at authorised
dealers and their customers, which it said were reporting “inaccurate and
misleading information” on their transaction rates, leading to distortions in
the official market.
“This behaviour is not compliant with the ethical standards
associated with a sound financial market, and deliberate attempts to create
price distortions by reporting false transaction details amounts to market
manipulation which will not be tolerated and will henceforth face sanctions,”
the bank said.
The naira has plumbed new depths since the peg was removed
as a lack of foreign exchange liquidity stalled planned reforms.
The central bank owes about $5bn in mature forward contracts
to different groups in the Nigerian economy that sold naira to the bank in
exchange for dollars. FIM’s Robertson warned that this backlog would have to be
resolved and short term interest rates needed to rise significantly to attract
portfolio investors.
It is a slight improvement on the $7bn the bank owed at the
start of the tenure of its new governor Olayemi Cardoso, a former Citigroup
executive. The bank has pledged to settle the backlog “within a short time” and
said it hopes to fix the “fundamental issues that have hindered the effective
operation of the Nigerian foreign-exchange markets”.
But sources of dollar inflows into Nigeria remain hard to
find. Investment into the country has fallen drastically and crude oil
production, from which it earns roughly 90 per cent of its export income, is
short of its 1.8mn barrels per day Opec quota. Central bank data shows it has
$32.87bn in foreign exchange reserves, although almost $20bn of this was
committed to paying off a series of derivatives deals.
Investors remain wary of bringing hard currency into the
country as dollar shortages have made it difficult for businesses to repatriate
revenues to their home countries.
Foreign airlines operating in Nigeria last month threatened
to strike over their inability to get money out of the country. Dubai-based
carrier Emirates suspended its flights to and from Nigeria in 2022 and has yet
to return. Nigeria said this week it released $64.4mn of trapped airline funds
but the International Air Transport Association said there was still $700mn
left to be paid out.
Finance minister Wale Edun said in Davos last month that
Nigeria is seeking about $1.5bn from the World Bank to ease liquidity concerns.
Last year he said the country had a “line of sight” on $10bn in inflows in the
country but that has yet to materialise. A scheme that saw the state oil
company pledge oil in exchange for dollars from the African Export-Import Bank
(Afrexim) netted Nigeria $3bn last month.
A senior western diplomat whose country has companies
operating in Nigeria told the Financial Times that businesses remain
unconvinced by the government’s announcements of potential dollar inflows to
ease the pervasive hard currency shortages.
On a visit to Nigeria last week, US secretary of state
Antony Blinken mentioned that the inability to repatriate capital was an
“impediment” to American investors maximising opportunities in Nigeria.
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