By Seyi Odewale
There is no doubting the fact that the nation’s currency had several free falls in the outgone year, particularly since the current administration of President Bola Ahmed Tinubu took over on May 29, 2023.
However, days before Tinubu took over as President of Africa’s biggest economy, the Central Bank allowed the nation’s currency to dip the most in almost five months.
Tinubu inherited an anaemic economic growth, record debt, and shrinking oil output and has promised to reset the economy. He has also said some decisions including removing a popular petrol subsidy would impose an extra burden on citizens but free up money for education, regular power supply, transport infrastructure, and healthcare.
The naira weakened to a record 465.07 per dollar as of 1.11 p.m. local time, the biggest drop since December 29, 2022. It was the second time in three days that the currency was touching a new low.
A few days after President Tinubu suspended the central bank governor, who oversaw much-criticised multiple exchange rates, the central bank allowed the naira to drop to as much as 36 percent on the official market.
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For decades, multiple exchange rates have led to foreign currency shortages. Under the former apex bank’s Godwin Emefiele, the situation worsened, making it difficult for investors to take out money from Africa’s biggest economy.
The Central Bank of Nigeria consequently removed trading restrictions on the official market, which drove the naira to a record low of 750 to the dollar on the official market, down from 477 naira to the dollar.
The new rate was equivalent to the black-market rate which has stood at approximately N750 to a dollar since last year. This was the first time since 2016 that the naira had recorded a big fall on the official market.
Foreign investors had flagged the forex restrictions as one of the biggest impediments to financing in Nigeria, Africa’s biggest oil producer.
Unifying the exchange rate and scrapping the subsidy were the most immediate tasks that Tinubu faced. Delivering these within the first two weeks of his presidency was well-received by investors and economists.
“What we are seeing is the removal of distortions created by inefficient pricing of foreign exchange and in the next few weeks we should start seeing the naira finding its level,” Bismarck Rewane, CEO of Financial Derivatives Company.
Nigeria’s sovereign dollar bonds surged as much as 2.7 cents on the dollar on the news of the devaluation, with longer-dated maturities rising the most.
The local banking index earlier surged 23 per cent to a more than 20-year high, after Emefiele’s suspension.
*Impacts of forex free-fall
On June 14, a few days after President Tinubu decided to suspend Emefiele, key currency restrictions on Nigeria’s official foreign exchange (FX) market were removed.
With this, the overvalued naira went through a massive devaluation as it was aligned with the black-market rate. For many, the decision was necessary to harmonise the naira’s value and boost confidence in Nigeria as an attractive destination for global investors. But the likely impacts of a weaker naira on Nigeria’s domestic corporate and banking spheres threw up a more complex situation.
The naira had already been weakened since Tinubu came in late May, and two weeks before the devaluation, there were pressures on the apex bank to bridge the gap between the official and the parallel exchange rates.
Though it was greeted with mixed feelings initially, Tinubu’s bold move to devalue the naira and remove fuel subsidies that cost the government no less than $10 billion in 2022, later received considerable support.
“The Central Bank of Nigeria wishes to inform all authorised dealers and the public of the following immediate changes to operations in the Nigerian Foreign Exchange Market: Abolishment of segmentation. All segments are now collapsed into the Investors and Exporters window,” this was the central bank’s announcement that all segments of the Foreign Exchange (FX) market would be unified to replace the old structure of different exchange rates, which served different purposes.
The new model, known as the “willing buyer, willing seller” model, became operational at the investors and exporters (I&E) window, which is the market trading segment for market investors, exporters, and end-users that allows for foreign-exchange trades “to be made at rates determined based on prevailing market circumstances to ensure efficient and effective price discovery within the Nigerian FX market”.
Resultantly, the massive devaluation of June 14 pushed the naira to N750 against the US dollar on the same day (a 36-per cent drop from the June 13 close), moving it more broadly in line with the prevailing black-market rate at the time. By the end of July, the official rate had weakened by more than 40 percent since the start of the year.
On December 8, last year, the naira fell to an all-time low of N1,099.05/$ at the official Investor and Exporter forex window to cap what has been a turbulent couple of months for the nation’s currency. This signified a 30.36 percent decline from its closing rate of N843.07/$ according to data from the FMDQ Securities Exchange. This was the lowest rate that the naira has closed since the Central Bank of Nigeria moved to adopt the I&E window as the official trading channel for the naira.
The naira began trading at N844.10/$ early in the day before closing at N1099.05/$. Since June, the naira has lost more than 40 per cent of its value adding to inflationary pressure in the country.
One of the effects of naira devaluation, according to experts, is that it makes it less expensive than other currencies, and this has two main implications according to the International Monetary Fund (IMF).
“First, devaluation makes the country’s exports relatively less expensive for foreigners,” the IMF explained, and secondly, it makes foreign products relatively more expensive for domestic consumers, making importation unprofitable. This, the IMF believed would help to increase the country’s exports and decrease imports and may help reduce the current account deficit.
Expectedly, the free fall of the naira terminated the central bank’s regime of foreign exchange rationing for importers, which limited their capacities to obtain foreign currency to service their international debt and payment obligations.
The effort, as it were, would encourage investment inflows into the country. “The devaluation and unification should bring an end to the multiple foreign exchange markets and rates, which have disincentivised business activities and deterred foreign investments,” said Ayodeji Dawodu, Head of Africa Research at United Kingdom-based BancTrust.
According to him, investors took advantage on the same day the devaluation was announced. “We note that most of the goods and services in the economy were actively being priced closer to the parallel market rate, which could limit the inflationary impact of the move for now.”
Other financial experts like Jason Tuvey, at Capital Economics, during the year said the devaluation would enable foreign investors to return after being absent for many years. “In the near term, it will be portfolio investors (who return), but we could see foreign direct investment coming in as well.”
Investor confidence in Nigeria’s monetary and exchange policies should also be bolstered by the central bank’s new regime put in place by the incoming government. But on the contrary, activities at the parallel market did not wind down despite the devaluation.
