Thursday, July 28, 2016

The Naira is floating as Nigeria eases its grip

Following prolonged periods of a fixed exchange rate owing to depleted foreign reserves, last month, the Central Bank of Nigeria (CBN) decided on a change of tack to adopt more flexibility. The new policy, the CBN said, would see the value of Nigeria’s naira currency determined by market forces and after the policy was adopted, the naira predictably fell sharply from around 199 naira per dollar to 282 naira per dollar.

But after the first day of the new floating policy, rather than the expected volatility in accordance with varying market conditions, the naira stabilized and it soon be came clear the naira had simply moved from one fixed peg to a new one. But in the past week, that appears to no longer be the case as the naira’s value has began to show the volatility expected of a floated currency related to market conditions.

Teneo Intelligence analyst Manji Cheto, who previously described the policy change as a”managed float” rather than a full float, says pegging the naira, rather than allowing a free-fall, was to be expected. “It was a little bit naive that the market and investors expected an immediate depreciation of the naira to around 350 after the supposed market driven system came into place.” Cheto says. “It betrayed a lack of understanding of the political reality in Nigeria.”

The perception of politics interfering with Nigeria’s currency policy is mainly due to president Muhammadu Buhari’s public statements. After months of strongly opposing a currency devaluation, when it finally happened Buhari immediately said he remained unconvinced that the float would be beneficial.

In part, the president was right. Even though his focus was on the impact of a devaluation on ordinary Nigerians, the new pegged value of the naira did not result in significant investment inflow due to uncertainty about the currency being traded for its actual value. Now though, it appears the CBN has been forced to enable a full market-driven system. However, even that alone will not fix all of Nigeria’s economic problems as the issue of a shortage of foreign exchange, which fuels investor reticence, still exists.

As Cheto says: “It’s not just about how quickly investors can get their money in, but about how quickly they can get it out.”

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