Nigeria ditches naira peg, introduces floating exchange rate

(Reuters) – Nigeria’s central bank will open a “purely” market-driven window for interbank foreign exchange trading, shifting away from a fixed exchange rate, in an effort to increase the supply of hard currency, the governor of the bank said on Wednesday.

 

The central bank will use the new trading scheme to inject foreign exchange liquidity, if needed, which Nigeria hopes will ease severe dollar shortages caused by a slump in oil revenue, Governor Godwin Emefiele said.

 

It was not clear at what rate the central bank would supply dollars to the interbank market. The central bank’s official rate is 197 naira to the U.S. dollar, but the currency trades at around a 50 percent discount on the parallel market.

 

Letting the market set the naira’s value is likely to drive down its value. That will make Nigerian products cheaper and competing imports more expensive, which should stimulate the domestic economy.

 

“The market shall operate as a single market structure through the interbank and autonomous window. The exchange rate will be purely market-driven,” Emefiele told reporters.

 

“To improve the dynamics of the market, we will introduce foreign exchange primary dealers who would be registered by the CBN to deal directly with the bank for large trade sizes on a two-way quote basis,” he said.

 

Investors approved of the idea: Nigeria’s stock market gained 3 percent following the announcement.

 

“Its a pretty important step in the right direction,” said Alan Cameron, an economist at Exotix in London. “Basically it amounts to a managed float, which is better than what most people were expecting. It’s a pleasant surprise.”

 

Emefiele also said the central bank will open a foreign exchange futures market to ease demand on spot trading, reduce volatility and give businesses more certainty.

 

Precise guidelines will be published later on Wednesday, he said, adding that the new window would have eight to 10 primary traders handling minimum volumes of $10 million.

 

Africa’s biggest economy, which contracted by 0.4 percent in the first quarter, faces its worst crisis in decades after the decline in oil prices and last year’s introduction of a currency peg that prompted large-scale capital flight.

 

“Over the long run, a weaker currency will help Nigeria’s economy by encouraging import substitution and attracting foreign investors, who have shunned the country for fear of a devaluation,” said John Ashbourne at Capital Economics.

 

“But the move will be painful over the short term. Higher import prices will add to inflation … This will probably force the authorities to tighten monetary policy.” (Additional reporting by Alexis Akwagyiram, Chijioke Ohuocha, Sujata Rao and Camillus Eboh; Editing by Larry King)