Nigeria’s central bank has recently allowed the naira currency to experience a significant drop in the official market. This decision comes shortly after President Bola Tinubu suspended the central bank governor who was responsible for managing the criticized multiple exchange rates system.
Over the years, the existence of multiple exchange rates has resulted in foreign currency shortages in Nigeria. Under the leadership of the suspended apex bank chief, Godwin Emefiele, the situation worsened, making it challenging for investors to withdraw money from the country’s largest economy.
According to traders who spoke to Reuters, the central bank has lifted trading restrictions on the official market. As a result, the naira has reached a record low of 750 to the dollar on the official market, a significant decline from the previous day’s rate of 477 nairas to the dollar. This new rate is in line with the black market rate, which has been around 750 to the dollar since last year.
Notably, this is the first substantial drop in the naira’s value on the official market since 2016 when the central bank introduced a managed exchange rate in 2017.
Charlie Robertson, the head of the macro strategy at FIM Partners, stated that this devaluation was much-needed, as it brings the currency’s overvaluation of 50 percent down to around 5-10 percent. This adjustment is expected to improve the current account and create a more favorable environment for long-term investments.
The central bank has not yet provided any official comments regarding this development. President Tinubu inherited an economy with slow growth, high levels of debt, and declining oil production. He has made promises to reset the economy and has acknowledged that certain decisions, such as removing popular petrol subsidies, may impose additional burdens on citizens. However, he believes that these measures will free up funds for education, consistent power supply, transportation infrastructure, and healthcare.
Foreign investors have considered forex restrictions as one of the main obstacles to financing in Nigeria, which is Africa’s largest oil producer. Unifying the exchange rate and eliminating subsidies were among the immediate tasks that President Tinubu had to address. The fact that these measures were implemented within the first two weeks of his presidency has been well-received by investors and economists.
Bismarck Rewane, the CEO of Financial Derivatives Company, stated, “What we are witnessing is the elimination of distortions caused by inefficient foreign exchange pricing, and in the coming weeks, we should witness the naira finding its equilibrium.”
Following news of the devaluation, Nigeria’s sovereign dollar bonds experienced a significant increase in value, with longer-term maturities showing the most substantial rise, according to Tradeweb data. The local banking index also soared by 23 percent to reach its highest level in over 20 years following the suspension of Governor Emefiele.