Traders and local bankers said Nigeria had abandoned its years-long peg to allow the naira to trade freely, triggering the biggest one-day drop in the country’s history.
The shift, which has not yet been confirmed by the central bank, would mark the latest in a series of high-profile moves since new governor Bola Tinubu took office last month. On Friday, Tinubu sacked central bank governor Godwin Emefiele, whose signature policy was to prop up the naira, amid expectations that Nigeria’s complex exchange rate system could end.
The country’s official exchange rate fell to N600 per dollar on Wednesday, down 23 percent from the previous day and its biggest one-day drop since 2016, according to Refinitiv data.
But the actual decline was more pronounced, traders said, with the naira actually changing hands at local banks for about 750 naira to the dollar, a 40% drop, the biggest drop on record and roughly in line with the parallel rate used by ordinary Nigerians. Local media reported that the central bank asked traders to trade the currency freely.
Abandoning the currency peg would end years of foreign exchange rationing and encourage portfolio and direct investment flows into Nigeria, investors and economists said. Jason Tuvey, emerging markets economist at Capital Economics, said that if the naira is allowed to float freely, foreign investors will make a comeback after years of absence.
“In the short term, it will be portfolio investors (returning), but we could also see foreign direct investment,” he said.
It would end years of complex foreign exchange management, allowing close-knit businesses and individuals in Nigeria to access dollars at subsidized rates. The multi-window system, designed to provide the dollars needed for basic imports, has left many without hard currency. Much of Nigeria’s economy operates on a parallel exchange rate, where the dollar is often 40% more expensive.
The system has hit foreign investors, who have been struggling to exchange their naira income or dividends for dollars. “The difficulty of getting money out has prevented money from getting in,” said Tope Lawani, managing partner of Helios Investment Partners, an Africa-focused investment firm. Because of this, he added, it hadn’t invested in Nigeria for at least six years.
Patrick Curran of emerging markets research firm Tellimer said ditching the currency regime would be “a very positive move”, adding that the issue “has been one of Nigeria’s biggest hurdles”.
Charlie Robertson, head of macro strategy at asset manager FIM Partners, said a depreciation would not necessarily lead to a price spike because most economies were already running at a parallel pace. “We can almost see some disinflationary effects,” he said.
A free-floating currency would mark another sharp shift in the direction of economic orthodoxy following eight years of interventionism under former president Muhammadu Buhari. Tinubu has already moved to eliminate popular but costly fuel subsidies that ate up $10 billion in state revenue last year. Petrol prices in Nigeria have since risen significantly.
Adedayo Ademuwagun, a consultant at Songhai Advisory, said the next move for the new government should be to appoint a new central bank governor and develop a credible plan to turn the economy around. “Otherwise, the economy remains vulnerable to shocks that undermine previous attempts to float the currency,” Ademuwagun said.
One of Emefiele’s deputies, Folashodun Adebisi Shonubi, is in charge of the central bank on an interim basis.
Foreign airlines are among those hardest hit by Nigeria’s dollar shortage. Airlines have stranded $812 million in Nigeria, more than any other country and almost half of the global total, the International Air Transport Association said at its annual meeting this month.