Nigeria adopted the multiple exchange rate regime to avoid an absolute devaluation of the naira, but this system provoked criticism from the IMF.
Nigeria’s central bank devalued the naira by 7.6% against the dollar as the authorities of Africa’s largest oil producer migrate to a single exchange rate system for the local currency.
The Abuja-based central bank of Nigeria replaced the fixed rate of 379 naira with a dollar used for official transactions with the more flexible nafex, also known as the investor and exporter exchange rate, which has had an average of 410.25 naira per dollar this year, according to data on its website on Tuesday.
“We found out that we were no longer dealing with this official tariff called CBN for transactions,” Gov. Godwin Emefiele told reporters during Tuesday’s monetary policy briefing. “We continue to run a managed float, we are monitoring the market and seeing what happens to us to make sure the right things go for the good of the Nigerian economy.”
The bank kept the interest rate at 11.5% in line with the average estimate from a Bloomberg survey.
“The official unification of these rates is a welcome development as the fragmented foreign exchange market had been a source of confusion and a source of arbitrage,” Neville Mandimika, a Johannesburg-based Rand Merchant Bank economist, said in an email.
Nigeria adopted the multiple exchange rate regime to avoid a direct devaluation of the naira, maintaining a stronger fixed rate for official transactions and a weaker exchange rate for non-governmental transactions. This currency management system was criticized by the International Monetary Fund and the World Bank withheld a $ 1.5 billion loan to try to push for more currency reforms.
NAFEX, which acts as a spot rate, was introduced in 2017 to improve the dollar’s liquidity and encourage inflows of foreign investors out of the country after the 2016 economic crisis. The West African nation suffered from a shortage of hard currency even sharper last year after the Covid-19 pandemic caused a drop in oil prices, forcing it to devalue the local unit twice.
Although crude contributes less than 10% to the country’s gross domestic product, it accounts for almost all foreign exchange earnings and half of government revenue.
“The most important thing for the market is now to allow greater flexibility in the window rate prices of investors and exporters to completely reduce the gap between the Nafex and the parallel market,” Chapel analyst said by telephone Hill Denham, Omotola Abimbola.
The latest move by the central bank is expected to improve confidence in policy-making, but the recovery in portfolio inflows will not be immediate as investors expect more dollar liquidity, analysts such as Simon Kitchen and Mohamed Abu Basha at EFG Hermes, based in Cairo.