Central Bank Chief's Removal Sets Stage for Currency Liberalization
Nigeria witnessed a momentous event as the country abandoned its long-standing currency peg, allowing the naira to trade freely. Traders and local bankers reported that this decision led to the largest single-day depreciation in the history of the currency.
Although the central bank has yet to confirm this move, speculation grew after President Bola Tinubu, who took office last month, removed Godwin Emefiele, the central bank chief known for his efforts to support the naira. Market observers had been anticipating a potential shift away from Nigeria’s complex exchange rate system.
The USD/NGN exchange rate plummeted to N600 against the dollarafter the announcement, representing a 23% drop from the previous day and marking the most significant single-session decline since 2016. However, traders revealed that the actual depreciation was even more substantial, with local banks trading the naira at around N750 to the dollar, signifying a 40% plunge. This figure closely aligns with the parallel rate commonly used by ordinary Nigerians. Reports from local media suggested that the central bank had advised traders to allow free trading of the currency.
Putting an end to the currency peg would bring an end to years of foreign exchange rationing and potentially attract portfolio and direct investments into Nigeria, as claimed by investors and economists. Jason Tuvey, an emerging markets economist at Capital Economics, expressed confidence that the liberalization of the naira would entice foreign investors who had been absent from the Nigerian market for many years.
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The abandonment of the currency peg would also terminate the complex foreign exchange management system that had allowed well-connected businesses and individuals in Nigeria to obtain US currency at subsidized rates. This multiple-window regime aimed to provide dollars for essential imports but left many people without access to hard currency. The majority of Nigeria’s economy operated at the parallel rate, where the dollar was typically 40% more expensive.
This system adversely affected foreign investors who encountered difficulties exchanging their naira revenues or dividends for dollars. “The difficulty of getting your money out inhibits putting your money in,” explained Tope Lawani, managing partner of Helios Investment Partners, an Africa-focused investment firm that had refrained from investing in Nigeria for at least six years due to these constraints.
The abandonment of the currency regime whas been hailed as a highly positive move by market researchers, who described it as one of the biggest obstacles in Nigeria. They also note that a NGN devaluation might not necessarily result in a surge in prices since most of the economy already operated at the parallel rate.
A freely floating currency represents a further departure from the interventionist economic policies pursued during former President Muhammadu Buhari’s eight-year tenure. Tinubu has already taken steps to eliminate the popular but costly fuel subsidies, which had depleted $10 billion in state revenues last year. As a consequence, petrol prices in Nigeria have risen significantly.
Adedayo Ademuwagun, a consultant at Songhai Advisory, emphasized the importance of the new government appointing a new central bank chief and devising a credible plan to revive the economy. Without such measures, the economy would remain susceptible to shocks that had derailed previous attempts to float the currency. For the time being, Folashodun Adebisi Shonubi, one of Emefiele’s deputies, has assumed temporary leadership at the central bank.
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