Nigeria’s central bank has ended its distorted foreign exchange rate, a move the new government in Africa’s biggest economy hopes will help woo investors and stabilize the local currency.
The announcement Wednesday from the Central Bank of Nigeria led to a record fall in the value of the naira currency to 755 per U.S. dollar. It has since recovered some.
The move reflects the changes that new President Bola Tinubu has pledged to make to strengthen the ailing economy, analysts said. He also has removed the head of the central bank following divisive policies and ended fuel subsidies, which economists have lauded as a long-term benefit even as they cause people short-term pain.
Nigeria has for years operated multiple exchange rates for the naira — with the official exchange rate dictated by the central bank, while a far higher unofficial rate determined the price of imported commodities like wheat, which are priced in dollars.
The exchange rate now will be determined by market forces and no longer the central bank, a move that analysts on Thursday said would boost inflows of money and help stabilize an economy battered by surging inflation and a record unemployment rate.
But it also is expected to make the price of imported goods more expensive, which could affect many in a country heavily reliant on imports.
“The multiple exchange rate regime was a major distortion to the workings of the market, such that there was no level playing field for many actors," said Taiwo Oyedele, Fiscal Policy Partner and Africa Tax Leader at financial services firm PwC.
The policy led to trading that exploited the price differences between the two markets "at the expense of legitimate economic activities,” Oyedele said.
The multiple exchange rates also meant foreign investors had been forced to sell outside currencies to Nigeria's central bank at the official rate and had been unable to access foreign money amid the country's severe dollar shortage.
That has affected many foreign businesses, including international airlines whose revenues that were trapped in Nigeria amounted to $450 million as of June last year.
“This is the major reason why foreign portfolio investments and foreign direct investments have literally dried up over the past couple of years,” Oyedele said. “Addressing this critical issue will unlock investments which will lead to growth, employment generation and revenue for the government to provide social needs.”
Tinubu has vowed that his “economic policies shall be guided by our desire for a stronger, more stable Naira founded upon a vibrant and productive real economy.”
Shortly after he took office, Tinubu suspended Godwin Emefiele, the central bank governor who was under fire for pushing new currency notes that led to a critical lack of cash for people to pay for their everyday needs. He has since been arrested.
Tinubu also halted subsidies for gasoline, forcing people to pay far more for fuel they need to travel and power generators at home. Now, the currency devaluation is expected to push up prices for imports like food amid a significantly higher foreign exchange rate.
Both “will cost considerable short-term pain but will correct the economy,” economic analyst Kalu Aja said.
The Nigerian leader, meanwhile, on Thursday inaugurated a key economic team chaired by Vice President Kashim Shettima and which advises him concerning the country's economic affairs.
