Nigeria has adopted a variety of exchange rate systems to avoid a complete devaluation of the naira, but this system has aroused criticism from the International Monetary Fund.
The Central Bank of Nigeria depreciated the Naira by 7.6% against the U.S. dollar because the authorities of Africa’s largest oil producer switched to a single exchange rate system using the local currency.
The Central Bank of Abuja, Nigeria replaced the fixed exchange rate of 379 naira with the more flexible Nafex (also known as the investor and exporter exchange rate), which was used for official transactions in the US dollar. The average exchange rate this year was 410.25 naira/US dollar. The data was published on its website on Tuesday.
“We found that we no longer use the so-called CBN official exchange rate for transactions,” Governor Godwin Emefiele told reporters at a monetary policy briefing earlier on Tuesday. “We are still in a managed float. We are monitoring the market and understanding what is happening to us to ensure that the right things are done for the benefit of the Nigerian economy.”
The bank maintained the interest rate at 11.5%, consistent with the median value surveyed by Bloomberg.
Neville Mandimika, an economist at Rand Commercial Bank in Johannesburg, said: “As the fragmentation of exchange rate markets is a source of confusion and arbitrage, the formal unification of these exchange rates is a welcome development.”
Nigeria has adopted a variety of exchange rate systems to avoid a complete devaluation of the naira by maintaining a fixed pegged exchange rate for official transactions and a weaker exchange rate for non-government-related transactions. This currency management system has been criticized by the International Monetary Fund (IMF), and the World Bank has retained $1.5 billion in loans to promote more foreign exchange reforms.
Nafex is a spot exchange rate, which was introduced in 2017 to increase the liquidity of the U.S. dollar and encourage the inflow of foreign investors who flowed out of the country after the 2016 economic crisis. After the Covid-19 pandemic caused oil prices to plummet, the West African country suffered even more severe hard currency scarcity last year, which forced the country to devalue its local unit twice.
Although crude oil contributes less than 10% of the country’s gross domestic product, it accounts for almost half of all foreign exchange revenue and half of government revenue.
Chapel Hill Denham analyst Omotola Abimbola said on the phone: “The key to the market is now to allow investors and exporters to set their window interest rates more flexibly in order to completely narrow the spread between Nafex and the parallel market.”
Analysts such as Simon Kitchen and Mohamed Abu Basha of Cairo-based EFG Hermes said that the latest central bank move is expected to increase confidence in policy making, but as investors wait for more dollar liquidity, the recovery of portfolio inflows will not be immediate.