Nigeria’s decision to abandon its 16-month hard currency peg has been trailed by applauds from investors and economists, the International Monetary Fund (IMF) recently threw its weight behind the cheers; however it’s a cautious endorsement.
An IMF spokesman said Wednesday’s move by the country’s central bank to devalue the naira was “an important and welcome step” but also cautioned that it still needs to see how effectively the new system will work.
The fund also did little to hide its infuriation with policy makers in Africa’s largest economy for insisting on maintaining their foreign exchange restrictions for so long, in a move that has clearly exacerbated the country’s economic woes.
It said, “Exchange restrictions are costly and distortionary; at best, they could be temporary, but should have been removed.”
Analysts have said the significant macroeconomic adjustment that Nigeria urgently needs to eliminate existing imbalances and support the competitiveness of the economy is best achieved through a credible package of policies involving fiscal discipline, monetary tightening, a flexible exchange rate regime, and structural reform. Allowing the exchange rate to better reflect market forces is an integral part of that adjustment.
Godwin Emefiele, governor of the CBN announced that the bank would begin the market driven foreign currency trading on Monday, abandoning the unrealistic naira to the greenback peg.
“This will bring confidence to the market. You can now begin to plan for your needs,” said Ini Ebong, Group Treasurer First Bank Holdings Plc, during an interview session at CNBC Africa.
“Fx inflow will spike with the return of foreign portfolio investors. The market has been reopened,” said Ebong.
Nigeria, Africa largest economy, hard hit by a significant drop in oil price by 60 percent, had its stock and bond indexes downgraded by international rating agencies as investors divested on the back of a rigid foreign exchange policy.
Standard & Poor’s (S&P), a global rating agency, revised Nigeria’s sovereign credit outlook to negative, from the stable it was previously. Nigeria currently has a B+ rating by the agency.
Moody’s Investors Service, in April, downgraded Nigeria’s long-term issuer ratings to B1 from Ba3 and has assigned a stable outlook, concluding the review for downgrade initiated on March 4th 2016.
The Central bank governor said there will be primary and secondary dealers and that the number of dealers will not be more than 8 or 10. He added that the apex bank is working hard to see that there is more supply of foreign exchange in the market.
“If we improve on the level of supply in the market, those demands will be met in the market. If you rush, you may hurt your profit, balance sheet and spike the interest rate,” said Emefiele.
