Nigeria devalues currency for 2nd time
Nigeria has drastically devalued its currency for the second time in eight months, to streamline its convoluted exchange rate system and draw capital to its collapsing economy, according to the Financial Times report.
This week has seen a sharp decline in the value of the naira due to a change in the formula used to determine the official exchange rate, bringing the currency closer to the parallel market.
This move is largely regarded as a component of Bola Tinubu’s market-friendly reforms. After taking office in May of last year, he removed the long-standing peg that the previous head of the central bank had put in place to keep the value of the currency high.
Nigeria maintained an official exchange rate, nevertheless, that was significantly higher than the freely-traded rate, making it more attractive to foreign businesses looking to make investments there.
The new methodology, which essentially eliminates the multiple exchange rates that irritated investors, could help Nigeria attract more investment, according to Charlie Robertson, head of macro strategy at asset management firm FIM Partners.
“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 update on the exchange rate calculation
The official exchange rate of Nigeria is determined by the FMDQ Group, which announced on Friday that it was updating its methodology to “address recent fluctuations and challenges encountered” in the country’s extremely volatile foreign exchange market, where the official rate frequently lagged behind values on the parallel market. On that day, the exchange rate publications were halted.
Moreover, FMDQ said that the updated exchange rate system, which it started releasing this week, will guarantee that “rates accurately reflect market conditions while upholding price formation and transparency.”
FMDQ also reported that the value of the currency dropped by almost 40 per cent to 1482.57 to the dollar on the official market on Tuesday and as low as 1,531 on Wednesday. According to one trader, that moved the naira past N1,475 to the dollar it is currently trading at on the black market.
CBN response to misleading information
In a move that it claimed was causing distortions in the official market, Nigeria’s central bank on Monday attacked authorised dealers and their clients for allegedly providing “inaccurate and misleading information” on their transaction speeds.
“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.
Since the peg was lifted, the naira has fallen even further as planned reforms have been stalled by a lack of foreign exchange liquidity.
Lack of foreign exchange
In mature forward contracts, the central bank owes approximately $5 billion to various Nigerian economic groups that sold the bank naira in exchange for dollars. Robertson of FIM issued a warning, stating that in order to draw in portfolio investors, this backlog would need to be cleared and short-term interest rates would need to rise considerably.
Compared to the $7 billion the bank owed when Olayemi Cardoso, the new governor, took office, it is a little improvement. Cardoso was formerly an executive at Citigroup. “Within a short time,” the bank has promised to clear the backlog, adding that it hopes to address the “fundamental issues that have hindered the effective operation of the Nigerian foreign-exchange markets.”
According to central bank data, the country has $32.87 billion in foreign exchange reserves; however, nearly $20 billion of those reserves were used to settle a number of derivatives transactions.
Investors are still hesitant to bring hard currency into the nation as dollar shortages have made it challenging for businesses to repatriate revenues to their home countries.
Last month, foreign airlines that operate in Nigeria threatened to go on strike because they are unable to get money out of the nation.
Emirates, a Dubai-based airline, stopped operating flights to and from Nigeria in 2022 and hasn’t started up again. The International Air Transport Association claimed that $700 million remained to be distributed despite Nigeria’s announcement this week that it had released $64.4 million in embezzled airline funds.
Wale Edun, the minister of finance, stated last month in Davos that Nigeria was asking the World Bank for roughly $1.5 billion to help with liquidity issues. He claimed last year that the nation had a “line of sight” on $10 billion in inflows, but those have not yet occurred. Nigeria earned $3 billion last month from a program that saw the state oil company pledge oil in exchange for dollars from the African Export-Import Bank (Afrexim).
The Financial Times was informed by a senior Western diplomat whose country has businesses operating in Nigeria that businesses are not convinced by the government’s announcements of possible dollar inflows to alleviate the widespread shortage of hard currency.
Moreover, U.S. Secretary of State Antony Blinken stated last week during a visit to Nigeria that the incapacity to repatriate capital was a “impediment” to American investors taking full advantage of opportunities in Nigeria.
