Nigeria: Central Bank drops currency peg
June 15, 2016
The Central Bank of Nigeria announced on 15 June that it would abandon the currency peg that crippled the country’s economy for more than a year. While analysts were expecting the Bank to implement a dual exchange rate, Governor Godwin Emefiele stated that there would be a single exchange rate driven by market forces. Although Emefiele pledged that the Bank would continue to intervene in the foreign exchange market “as the need arises”, this move, effective on 20 June, is expected to prompt the naira to depreciate sharply. The naira is currently trading at around 370 per U.S. dollar in the black market and analysts believe that the official exchange rate will settle at around 250–350 NGN per USD.
In the first quarter of 2015, the Central Bank decided to peg the naira at around 198 NGN per USD in the face of the slump in the price for oil, which represents around 90% of export revenues. Along with this measure, the Bank also issued decrees banning the import of some products and reducing the offer of hard currency in an attempt to not burn through its foreign-currency reserves at a breakneck pace. Although the Bank did manage to keep reserves afloat, they fell from USD 34.3 billion in January 2015 to USD 26.4 billion in May. Nevertheless, the main consequences of the Bank’s policy were a severe scarcity of hard currency and strong inflationary pressures, while importers struggled to purchase materials and equipment from abroad. This situation drove the economy to contract in Q1 for the first time in over a decade.
Looking forward, despite the adoption of a more market-determined exchange rate, Nigeria is still facing a tough road ahead. A weaker naira will likely force the Central Bank to hike interest rates in a bid to counter soaring inflation, which could in turn hit economic growth. Moreover, militant attacks on oil facilities is cutting oil production in the country dramatically.