In Retreat for Buhari, Nigeria Prepares to Let Naira Weaken

  • Africa’s biggest economy is set to introduce dual-rate system
  • Central bank leaves policy rate unchanged as economy contracts

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 Tuesday 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 at 8:56 a.m. 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.

For an analysis of why Nigeria needs foreign-exchange reforms, click here.

‘Technical Devaluation’

“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.”

Policy Rate

The Monetary Policy Committee left its benchmark interest rate at 12 percent on Tuesday. Two of the 20 economists surveyed by Bloomberg predicted the decision, while the rest forecast the MPC would raise the rate by between 50 basis points and 250 basis points. The cash-reserve ratio for commercial banks was left unchanged at 22.5 percent.

Falling prices and production of crude, from which Nigeria derives as much as 70 percent of state revenue, have caused the nation’s economic outlook to deteriorate as the government struggles to pay salaries and stimulate growth, forcing it to increase borrowing. Nigeria’s gross domestic product fell by 0.36 percent in the three months through March from a year earlier -- the first quarterly contraction since 2004 -- as oil output slumped amid militant attacks on pipelines and as the central bank’s FX restrictions led to shortages of imported goods, including fuel.

A recession “now appears imminent,” Emefiele said.

‘Buhari’s Calls’

A move to loosen capital controls and allow the naira to trade more freely may boost the country’s capital markets, including its stocks, which have fallen 4.9 percent this year, according to Tundra Fonder AB. The Stockholm-based firm has about $200 million invested in frontier market equities, including Nigerian banks.

“I am waiting for Buhari to say something, since he is the one making all the calls,” said Mathias Althoff, a fund manager at Tundra Fonder. The company sold some stocks about six weeks ago and is still waiting for foreign-exchange to repatriate the funds. “I think it will still be a controlled market. They will probably introduce a new level and a band of, say, five or 10 percent around it. My fear is that they won’t go as far as they need to. If they drop it to 220 or 230, that won’t be enough for the market.”

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