Preliminary disruptions of the international crude oil market and its ancillary effects as a result of the Covid-19 pandemic has forced the hands of the Nigerian government t take two tough decisions in a space of 48 hours. First was the reduction of the fuel pump price from N145 per litre to N125 per litre. The second was the devaluation of the country’s currency; naira from the official N307 to N360 to a dollar, with aim to achieve a uniform exchange rate, ditching a formula of dual to multiple exchange rates which has drawn the ire of many critics and economic analysts over the years.
The Central Bank of Nigeria, in a rather surprising move announced the migration of the exchange rates to a single exchange rate for the naira by collapsing the multiple exchange rate policy that determined the value for the local currency. Sources at the apex bank say that this decision was forced on the bank after the global coronavirus pandemic more than halved oil prices, raising pressure on the currencies of crude-dependent economies like Nigeria, Africa’s largest producer of the commodity. The action of the Bank thus weakened the official exchange rate by 15% to 360 naira per dollar from 307 naira. The rate for foreign portfolio investors was also altered, to 380 naira per dollar from 366 naira.
With the merging of the official rate, the rate for investors and exporters and rate for foreign-exchange bureaus are the first steps among others, according to the people, who asked not to be identified because they are not authorized to speak publicly about the matter.
Nigeria’s system of multiple exchange rates aimed to control demand for dollars following the collapse of oil prices in 2014. The official rate supplies cheap foreign exchange to government departments and select companies, including fuel importers. After its last devaluation in 2017, the central bank created an investors and exporters window, which allowed for some movement, but was closely managed by the regulator. The naira has come under tremendous pressure since oil prices slumped to around $30 a barrel, below the government’s $57 target. Earnings from sales of crude account for 90% of foreign-exchange earnings and more than half of government income.
Read also:Nigeria Has No Plan To Devalue Its Currency — CBN
A weaker official rate will give a big boost to the revenues of the federal government and states by allowing dollar earnings from oil to be converted to naira at a higher rate. It will also, however, increase the value of the government’s foreign liabilities in local currency. Changes to the exchange regime were welcomed by analysts and investors, but they may not be enough to ease pressure on the naira just yet.
Even at N360 to a dollar, some analysts feel that there will still be another shift closer to N400 to a dollar as market indices does not support a stronger naira at the moment. The blamed the inefficiencies and complexity of Nigeria’s exchange rate system made it prone to corruption, welcoming this move and hope the Central Bank will have the will power to do what is needful instead of falling to the whims of political interference.
Kelechi Deca
Kelechi Deca has over two decades of media experience, he has traveled to over 77 countries reporting on multilateral development institutions, international business, trade, travels, culture, and diplomacy. He is also a petrol head with in-depth knowledge of automobiles and the auto industry