City in Nigeria

Nigeria Exchange Rate June 2023

Nigeria: Central Bank sets the naira free

On 14 June, the Nigerian naira (NGN) lost a staggering 25% of its value relative to the previous day, falling to an all-time low of 620 per USD from 463 per USD, Refinitiv data showed. According to market participants, the currency fell to NGN 750 per USD on 14 June, losing nearly 40% of its value from 13 June and matching black market levels. Prior to this sharp devaluation, the naira was on a downward trajectory, having lost 3.2% of its value on 13 June in year-to-date terms. The fall was caused by the Central Bank’s (CBN) decision to allow the naira to fluctuate freely; Central Bank intervention in the FX market had previously kept the naira from tanking despite sustained downward pressures. Moreover, the CBN also abolished the multiple-window exchange rate regime.

The Nigerian economy has undergone substantial reforms in recent weeks, after President Tinubu was sworn into office on 29 May. In the monetary arena, on 9 June, Tinubu suspended the Central Bank governor, hinting at a sharp policy shift. On 14 June, the CBN announced the abolishment of the multiple exchange rate system and paused its intervention in FX markets. The complex web of exchange rates, coupled with constant intervention, had been a drag on the economy, creating significant distortions such as dollar scarcity and impeding foreign investment. Moreover, this approach also led to substantial current account imbalances.

The new FX regime will push up inflation in the short term via a larger import bill; moreover, the removal of fuel subsidies in late May will add further upward pressure. On the flip side, the floating exchange rate will strengthen investor sentiment and buttress capital inflows. If the country can navigate economic duress in the coming months, in the longer term, it will enjoy a much more sustainable external position and headwinds stemming from a more attractive business climate. Interest rate movements and capital controls are key factors to monitor during the transition to the new monetary framework.

Andrew Matheny and Bojosi Morule from Goldman Sachs commented on implications for monetary policy:

“As we have argued previously, introducing currency flexibility and/or easing restrictions on access to FX would very likely need to be accompanied by higher local interest rates (with prevailing short-term market interest rates currently deeply negative in real terms).”

Meanwhile, analysts at the EIU commented on risks to the outlook:

“There is a high risk of the policy being reversed if higher inflation threatens overall stability—something we cannot rule out given the speed of market reform. Mr Tinubu appears bent on short-term, intense economic pain followed by long-term gain, a risky strategy in a fragile country.”

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