On May 25th, the Governor of the Central Bank of Nigeria (CBN), Godwin Emefiele, made the long-awaited announcement that the country would no longer peg the naira at N197 to the dollar. This change went into effect on Monday, which was the first time in recent history that the naira’s value was determined by market forces. The change represents the latest significant macroeconomic policy change by the government, following the lifting of fuel subsidies and restrictions on fuel imports last month.
Nigeria had held its currency at N197-199 to the dollar for the last 16 months, despite the steep dive in oil prices, which accounted for approximately 90% of Nigeria’s earnings from exports. The drop in the price of oil and decline in exports caused a severe foreign exchange shortage, forcing the Nigerian government to restrict currency exchange. Emefiele banned the use of forex for the importation of several dozen products—ranging from toothpicks and Indian incense to private airplanes—in mid-2015, followed by a restrictive limitation of dollar-denominated ATM transactions for bank customers. The Central Bank then discontinued the sale of foreign exchange to currency exchange operators in the country in mid-January 2016, and blocked many online payments in foreign currencies for Nigerian cardholders. Throughout this period, the black market exchange rate soared as high as N360 to the dollar.
While most welcome the new policy, the government has made it clear that the policy change will not improve the economy overnight. According to some reports, there is up to $4 billion worth of unmet demand in the forex market that must be addressed. There are concerns that this significant backlog may take longer than the targeted four weeks to clear following this week’s policy shift.
Still, international actors have lauded Nigeria’s forex policy shift. IMF spokesman Gerry Rice conveyed the IMF’s view on the issue, stating in a letter to Nigerian President Buhari that the government’s policy shift “is an important welcome step,” and that “it will provide greater flexibility in . . . the foreign exchange market.”
Nigeria was one of few oil-exporting countries to maintain its fixed currency value following the dramatic decline in the price of oil. Other oil-exporters, such as Angola and Russia, allowed their currency rates to float. Experts believe that the official exchange rate will settle somewhere between N275 and N300 in the new market, although Emefiele wrote in a letter to President Buhari that he expects the exchange rate to stay closer to N250 to the dollar.
The naira took a predictable dive, of about 23 percent, against the dollar following the currency float. The resulting devaluation of the naira will have several immediate effects on Nigeria’s economy. One positive effect is that the flotation of the naira will boost exports, as the ensuing devaluation will make Nigerian exports cheaper. The CBN also hopes that the devaluation will ease business transactions for those that have found it difficult to procure foreign currency. However, a rise in inflation is also expected to accompany the devaluation.
At this time, it remains unclear if this policy shift will be accompanied with the easing of other restrictions that have limited business operations in Nigeria, such as the limitations on repatriation of currency. With the prices of consumer goods soaring, individuals and entities still limited in their access to foreign currency, and the economy retracting for the first time in more than a decade, the CBN Governor and President Buhari will have to make many more substantial policy changes to battle inflation and recession.
This post can also be found on CovAfrica, the firm’s blog on legal, regulatory, political and economic developments in Africa.