Nigeria will float its embattled naira currency, the Central Bank governor announced on Wednesday after months of pressure to control a spiraling crisis in Africa’s biggest economy.
Governor of the Central Bank of Nigeria, Godwin Emefiele told reporters the naira rate will be “market-driven” from June 20.
Critical foreign currency shortages caused by slumping oil prices forced a policy change that President Muhammadu Buhari had resisted for months. The bank had defended the naira at a rate of 197 to the dollar while the currency was trading at up to 370 on the parallel market.
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“They have to accept reality at some point after a period of denial,” said Ayo Teriba, CEO of Economic Associates consultancy. Companies were unhappy with the government forcing them to exchange their imported foreign exchange at the low fixed rate and, when they needed to buy some, use the parallel market at the much higher rate, he told reporters.
Emefiele indicated a floating naira should get rid of speculators.
There will be only one exchange rate in “an open, transparent system,” he said.
Companies have gone bust, tens of thousands of workers have lost their jobs and militant attacks have shrunk oil production as Nigeria’s economy contracted for the first time in nearly 20 years.
Companies with naira earnings that the government has refused to allow them to repatriate will take a hit. International airlines are holding the equivalent of $600 million at the old exchange rate, according to the International Air Transport Association.
Analysts warn of expected interest rate hikes to tackle double-digit inflation.
“These actions are a down payment on our people’s ability to succeed,” Buhari, under pressure to devalue since his March 2015 election, wrote Wednesday in The Wall Street Journal.
“Longstanding structural imbalances and over dependence on imports have been cruelly exposed,” Buhari wrote. “We are an oil-rich nation that imports most of our gasoline. We are a farming nation that imports most of our basic food staples.”
Many Nigerians criticized the delay. “And they finally float the Naira, 9 months late. It will take us 2 years to recover from this unnecessary stubbornness,” one said on social media.
Another bitter commentator posted: “So we crashed our whole economy, killed business, killed bank jobs, suffered hyperinflation for NOTHING. We have floated the Naira too late.”
But Kevin Daly of Aberdeen Asset Management said he was “pleasantly surprised.” Many had expected the government to devalue, but not enough. He said it remained to be seen what the government can do to provide liquidity with foreign currency reserves some $10 billion below the published figure of $26 billion.
The gap between the value of exports and imports will decide the new naira rate, Teriba said.
Daly said the weakened naira would fuel inflation but “this is the price they have to pay for a failed policy … which has been like a noose round the neck of Nigeria’s economy.”