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Nigeria has sharply devalued its currency for the second time in eight months, as the west African country bids to clear up its messy system of exchange rates and attract investment to its flailing economy.
The naira has tumbled this week after the methodology used to calculate the official exchange rate was changed, taking the currency closer to the black market rate.
The move is widely seen as part of market-friendly reforms being introduced by Bola Tinubu, who became president last May and who shortly afterwards jettisoned the years-long peg instituted by the former central bank chief that had kept the currency artificially high.
However, the country still kept an official rate that was well above the freely-traded rate, which made it more expensive for multinational companies wanting to invest in Nigeria.
Charlie Robertson, head of macro strategy at asset management firm FIM Partners, said the new methodology could help Nigeria attract more investment as it essentially abolishes the multiple exchange rates that frustrated investors.
“It could take months but there could be more dollars swirling around in Nigeria now that the currency is officially very cheap,” Robertson said.
FMDQ Group, which calculates the country’s official exchange rate, announced on Friday that it was revising its methodology to “address recent fluctuations and challenges encountered” in Nigeria’s highly volatile foreign exchange market, where the official exchange rate often trailed parallel market values. The publication of exchange rates was suspended that day.
The revised exchange rate system, which FMDQ began publishing this week, will ensure that “rates accurately reflect market conditions while upholding price formation and transparency”, the firm said.
The currency fell by nearly 40 per cent to 1482.57 to the dollar on the official market on Tuesday and slipped as low as 1,531 on Wednesday, according to FMDQ. That took the naira past N1,475 to the dollar it is trading at on the black market, according to one trader.
Nigeria’s central bank on Monday took aim at authorised dealers and their customers, which it said were reporting “inaccurate and misleading information” on their transaction rates, leading to distortions in the official market.
“This behaviour is not compliant with the ethical standards associated with a sound financial market, and deliberate attempts to create price distortions by reporting false transaction details amounts to market manipulation which will not be tolerated and will henceforth face sanctions,” the bank said.
The naira has plumbed new depths since the peg was removed as a lack of foreign exchange liquidity stalled planned reforms.
The central bank owes about $5bn in mature forward contracts to different groups in the Nigerian economy that sold naira to the bank in exchange for dollars. FIM’s Robertson warned that this backlog would have to be resolved and short term interest rates needed to rise significantly to attract portfolio investors.
It is a slight improvement on the $7bn the bank owed at the start of the tenure of its new governor Olayemi Cardoso, a former Citigroup executive. The bank has pledged to settle the backlog “within a short time” and said it hopes to fix the “fundamental issues that have hindered the effective operation of the Nigerian foreign-exchange markets”.
But sources of dollar inflows into Nigeria remain hard to find. Investment into the country has fallen drastically and crude oil production, from which it earns roughly 90 per cent of its export income, is short of its 1.8mn barrels per day Opec quota. Central bank data shows it has $32.87bn in foreign exchange reserves, although almost $20bn of this was committed to paying off a series of derivatives deals.
Investors remain wary of bringing hard currency into the country as dollar shortages have made it difficult for businesses to repatriate revenues to their home countries.
Foreign airlines operating in Nigeria last month threatened to strike over their inability to get money out of the country. Dubai-based carrier Emirates suspended its flights to and from Nigeria in 2022 and has yet to return. Nigeria said this week it released $64.4mn of trapped airline funds but the International Air Transport Association said there was still $700mn left to be paid out.
Finance minister Wale Edun said in Davos last month that Nigeria is seeking about $1.5bn from the World Bank to ease liquidity concerns. Last year he said the country had a “line of sight” on $10bn in inflows in the country but that has yet to materialise. A scheme that saw the state oil company pledge oil in exchange for dollars from the African Export-Import Bank (Afrexim) netted Nigeria $3bn last month.
A senior western diplomat whose country has companies operating in Nigeria told the Financial Times that businesses remain unconvinced by the government’s announcements of potential dollar inflows to ease the pervasive hard currency shortages.
On a visit to Nigeria last week, US secretary of state Antony Blinken mentioned that the inability to repatriate capital was an “impediment” to American investors maximising opportunities in Nigeria.