Nigeria: Naira depreciates drastically following scrapping of currency peg in June
August 18, 2016
The naira has been weakening against the U.S. dollar since June when the Central Bank scrapped the currency peg that had kept it at an artificially-high value of around 198 NGN per USD for over a year. Directly after the peg was abandoned on 20 June, the currency lost over 40% of its value against the USD and fell to 282 NGN per USD. While the Central Bank had pledged to move to a free-floating exchange regime, it intervened in the foreign exchange market in the weeks after the devaluation to keep the naira within a narrow range of 282 to 285 NGN per USD. In mid-July, the Bank reduced its interventions, causing the naira to depreciate further. On 28 July the currency fell to a record-low of 322 NGN per USD, which marked a 14.2% depreciation over the same day in June and a 61.8% depreciation in annual terms. Since then, the naira has been fluctuating at low levels. On 18 August it traded at 321 NGN per USD.
Most analysts agree that the abandonment of the currency peg was long overdue. Greater exchange rate flexibility sparked hopes that the shortage of hard currency and restrictions on imports, which were partly behind Nigeria’s disappointing economic performance in Q1, would ease. Nevertheless, the country still faces significant headwinds. The depreciation of the naira prompted the Central Bank to hike interest rates to a record high in July in an effort to combat rising inflation, which risks restraining economic activity. Ongoing militant attacks on oil facilities are exacerbating the situation by hampering oil production in the country.