New Window: Will Nigeria's Latest Step In Letting the Naira Loose Bring The Money Back? 2

The naira tweak

Nigeria has taken a step forward to infuse confidence in overseas investors. The country’s central bank has recently allowed for a new foreign exchange window where the naira will float freely in an effort to lure back investors.

The background

One of the major decisions made by the nation in 2016 was to allow the domestic currency – the naira – to float freely from June 15. The sharp rise seen in the graph above was reflective of the adjustment that the currency had to go through after the free-float became effective.

However, what followed was not the most palatable of scenarios for investors — even after removal of the peg to the dollar, regulators continued supporting the unit. This was reflected in the parallel market where the currency continued trading at a substantial discount compared to the official rate.

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According to Bloomberg, the naira had nosedived to 520 to one US dollar in February this year while the official interbank remained at around 315. The central bank sold $3 billion to $4 billion on the spot and forward markets, which strengthened the parallel market rate to about 390 to one US dollar.

This artificial control made investors cautious about ploughing in money, which has resulted in a contraction in foreign exchange liquidity.

Further, even though Nigeria’s $1 billion sale in February had fetched a lower than expected yield of 7.8%, the country could have gotten a better deal if the naira was floating freely like Egypt has allowed its pound to do.

Impact of the tweak

The tweak seems to be a way for the central bank to get comfortable with the weak naira and observe how the rates on this special window fare as compared to those in the parallel market.

The impact of the new window – which will be available for exporters as well as stocks and bond investors – will be seen in the central bank’s willingness to readjust the interbank rate. For now, the central bank says it retains the authority to intervene in the new window as well which is not a stance that will boost increase investor confidence.

It is a step in the right direction though, especially for a country whose economy is still less than prosper. There are other steps being taken by Nigeria to bring its economy back to life. Let’s look at these in the next article.

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