Nigeria floats currency to save crippled economy

ABUJA, Nigeria—Nigeria’s central bank said yesterday the country’s currency would trade at the market-driven rate, beginning on Monday. Economists lauded the move, which has already prompted a rise in stock prices, as many feared the former fixed exchange rate policy could send Africa’s largest economy into recession.

The central bank had pegged the Nigerian naira at 199 to $1, while it traded at about 370 on the black market. Central Bank governor Godwin Emiefele, said under the new system only eight to 10 primary dealers will supply the interbank market with dollars to create a single market system. The central bank will still be able to inject dollars into the market periodically, if the need arises.

“This is an innovation which we have introduced to moderate volatility in the foreign exchange market,” Emiefele said. “You do not have to fear that what is happening to crude prices will affect the rate you source your dollar in say three months when you need it.”

The move comes after Nigeria resisted devaluing its currency like other major oil producers, plunging the economy into its worst state in nearly 20 years. Foreign reserves have declined by $16 billion in about two years, while the demand for foreign exchange has risen.

The imbalance has left several companies on the edge. Commodity prices soared across the country and the government lacked the foreign funds to pay the deficit of more than $600 million in airline ticket sales.

“This is the least costly option right now because the CBN cannot continue to supply forex to the market,” said Precious Akanonu, a researcher with the Center for the Study of the Economies of Africa, in Abuja.

Despite the upturn the new policy brings, floating the currency likely will weaken it and increase inflation. The singular market system means dollars will initially remain in scarce supply for private individuals.

“It will take time for people to adjust to the new policy, but it should be better for the average Nigerian in the long run,” Akanonu added.

The weaker currency likely will attract foreign investors, who will get more for their money. The Nigerian stock market already gained 3 percent following the announcement, which signaled growing confidence.

“We expect the renewed market confidence amidst the clarity on currency market framework to stir the Nigerian Stock Exchange ASI (All-Share Index) to another strong close in the session ahead,” said Vevita Capital Management, a Lagos state-based financial services company, in an analysis of the new currency policy.