Nigeria’s Naira Drops Significantly on Official Market

The Central Bank of Nigeria has allowed the naira, the country’s currency, to drop by as much as 36 percent on the official market. This significant devaluation occurred just days after President Bola Tinubu suspended Central Bank Governor Godwin Emefiele, who had been criticized for maintaining multiple exchange rates.

For many years, Nigeria’s practice of having multiple exchange rates led to shortages of foreign currency. Under Emefiele’s tenure, these issues reportedly intensified, complicating the process for investors to withdraw funds from Africa’s largest economy.

Traders informed Reuters that the central bank had lifted trading restrictions on the official market, leading to the naira plunging to a record low of 750 to the dollar. This rate now aligns with the black market rate, which has hovered around 750 to the dollar since last year.

This drop marks the first significant fall in the naira on the official market since 2016, before the central bank introduced a managed exchange rate system in 2017.

Charlie Robertson, Head of Macro Strategy at FIM Partners, commented on the devaluation: “A much-needed devaluation which takes the currency from 50 percent overvalued to about 5-10 percent [cheaper]. This should improve the current account and improve the long-term investment climate.”

The central bank has not yet issued a comment on the devaluation.

President Tinubu, who took office facing challenges like slow economic growth, high debt, and reduced oil output, has pledged to rejuvenate the economy. He has indicated that some decisions, such as removing a popular petrol subsidy, would be tough but necessary for freeing up funds for critical sectors like education, energy, transportation, and healthcare.

Foreign investors had previously identified the forex restrictions as a major barrier to investment in Nigeria, the largest oil-producing country in Africa. The unification of the exchange rate and removal of the petrol subsidy were among Tinubu’s immediate tasks upon assuming presidency. His quick action on these issues has been positively received by investors and economists.

Bismarck Rewane, CEO of Financial Derivatives Company, noted, “What we are seeing is the removal of distortions created by inefficient pricing of foreign exchange and in the next few weeks we should start seeing the naira finding its level.”

Following the news of the devaluation, Nigeria’s sovereign dollar bonds experienced a surge of up to 2.7 cents on the dollar, particularly in longer-dated maturities, as per Tradeweb data. Additionally, the local banking index jumped 23 percent to a more than 20-year high following Emefiele’s suspension.

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