Nigeria Central Bank Said to Weigh Dual Exchange-Rate System

  • Central bank may unveil new policy this week, person says
  • Naira forwards rise to record, suggesting fall to 301 by Sept.

The Central Bank of Nigeria may introduce a dual exchange-rate system and weaken the naira when it unveils a new policy as soon as this week, according to a person who attended a meeting between Governor Godwin Emefiele and bankers.

The regulator will probably make an announcement in a circular to banks, said the person, who asked not to be identified discussing the private talks held June 9 in Abuja, the capital.

Analysts including those at Renaissance Capital Ltd. have said they expect the central bank to allow the naira to weaken around a trading band in the interbank market, while allocating dollars at a fixed rate to industries the government deems strategic. The central bank is still working out details of the system, the person said, and may also reinstate a minimum holding period for foreign investors buying naira bonds.

Emefiele has faced calls for more than a year to devalue the currency, as other oil exporters from Russia to Kazakhstan and Angola have done, amid a rout in crude prices since mid-2014 to around $50 a barrel. Investment into Nigeria has shriveled as foreigners are put off by capital controls needed to defend the peg, while local businesses have struggled to import raw materials and equipment.

Naira three-month forwards rose to 301 against the dollar by 3:45 p.m. in London, poised for a record close and suggesting traders see the currency falling to about that level from the spot price of 198.5. Forward contracts maturing in a year traded at 340, also a record high.

Isaac Okorafor, an Abuja-based spokesman for the central bank, didn’t answer calls to his mobile or immediately reply to a text message requesting comment.

Index Inclusion

Africa’s biggest economy removed a requirement for foreign investors to hold local-currency debt for at least one year in mid-2011. That led to Nigeria’s inclusion the following year in JPMorgan Chase & Co.’s local-currency emerging market bond indexes, tracked by more than $200 billion of funds, and also prompted naira yields to plummet. The country was kicked out of the indexes last September because JPMorgan said the currency restrictions made it hard for investors to trade naira bonds.

Nigeria has held the naira at 197-199 per dollar since March 2015, with Emefiele and President Muhammadu Buhari both insisting that a weaker currency would leave consumers facing higher prices. That’s already happened, with inflation accelerating to an almost six-year high of 13.7 percent in April. The statistics bureau is due to announce figures for May on Tuesday.

Economists have blamed the capital controls for exacerbating a foreign-exchange liquidity crisis caused by the drop in the price of oil, which accounted for two-thirds of government revenue and 90 percent of exports in 2014. Growth was negative in the first quarter for the first time since 2004 and a recession, or two consecutive quarters of contraction, is imminent, the central bank said last month.

The central bank’s reserves have fallen to a more than 10-year low of $26.4 billion as it seeks to defend the currency. The naira has plummeted to around 365 per dollar on the black market as shortages of the greenback worsened.

‘Created Doubt’

The black market rate may strengthen if the official one is weakened and inflows from investors pick up, according to Aminu Gwadabe, president of the Bureau de Change Operators of Nigeria.

“The naira might trade around 300 to a dollar on the black market after the announcement, because we expect supply to improve,” he said by phone from Lagos, the commercial capital. “In the past weeks, the central bank created doubt in the market, which triggered another round of speculation.”

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