Unlock Editor’s Digest for free
Roula Khalaf, editor-in-chief of the FT, selects her favorite stories in this weekly newsletter.
Nigeria has sharply devalued its currency for the second time in eight months, as the West African country tries to bring order to its messy exchange rate system and attract investment into its economy in trouble.
The naira fell this week after the methodology used to calculate the official exchange rate was changed, bringing the currency closer to the black market rate.
The move is widely seen as part of market-friendly reforms introduced by Bola Tinubu, who became president last May and soon after abandoned the years-long peg instituted by the former central bank chief that artificially maintained the currency. high.
However, the country still maintained an official rate well above the free trade rate, making it more costly for multinational companies wanting to invest in Nigeria.
Charlie Robertson, head of macro strategy at asset management firm FIM Partners, said the new methodology could help Nigeria attract more investments, as it would essentially abolish multiple exchange rates which frustrated investors.
“It could take months, but there could be more dollars circulating in Nigeria now that the currency is officially very cheap,” Robertson said.
The FMDQ Group, which calculates the country’s official exchange rate, announced Friday that it was revising its methodology to “address recent fluctuations and challenges encountered” in Nigeria’s highly volatile foreign exchange market, where the exchange rate official often lagged behind parallel market values. The publication of exchange rates was suspended that day.
The revised exchange rate system, which FMDQ began publishing this week, will ensure that “rates accurately reflect market conditions while ensuring price formation and transparency,” the company said.
The currency fell nearly 40 percent to 1,482.57 per dollar on the official market on Tuesday and fell as low as 1,531 on Wednesday, according to the FMDQ. This took the naira beyond 1,475 Naira to the dollar at which it trades on the black market, according to a trader.
Nigeria’s central bank on Monday targeted authorized dealers and their customers, who it said were reporting “inaccurate and misleading information” on their transaction rates, leading to distortions in the official market.
“This behavior is not consistent with the ethical standards associated with a healthy financial market, and deliberate attempts to create price distortions by reporting false transaction details amounts to market manipulation which will not be tolerated and will now be punishable sanctions,” the bank said.
The naira has reached new highs since the peg was removed as a lack of foreign exchange liquidity blocked planned reforms.
The central bank owes about $5 billion in matured futures contracts to various groups in the Nigerian economy who sold it naira in exchange for dollars. FIM’s Robertson warned that this backlog would need to be addressed and short-term interest rates would need to rise significantly to attract portfolio investors.
That’s a slight improvement from the $7 billion the bank owed at the start of the term of its new governor Olayemi Cardoso, a former Citigroup executive. The bank pledged to clear the backlog “within short notice” and said it hopes to resolve the “fundamental issues that have hampered the efficient functioning of Nigeria’s foreign exchange markets.”
But sources of dollar inflows to Nigeria remain difficult to find. Investment in the country has fallen drastically and production of crude oil, from which the country derives about 90 percent of its export earnings, is below its OPEC quota of 1.8 million barrels per day. Central bank data shows it has $32.87 billion in foreign exchange reserves, although nearly $20 billion has been spent repaying a series of derivatives trades.
Investors remain cautious about bringing hard currency into the country as the shortage of dollars makes it difficult to repatriate corporate income to their home countries.
Foreign airlines operating in Nigeria threatened strike action last month over their inability to move money out of the country. Dubai-based Emirates airline suspended flights to and from Nigeria in 2022 and is yet to return. Nigeria announced this week that it had released $64.4 million in funds blocked by airlines, but the International Air Transport Association said there was still $700 million left to disburse.
Finance Minister Wale Edun said in Davos last month that Nigeria was seeking about $1.5 billion from the World Bank to ease its liquidity problems. Last year, he said the country had a “line of sight” on $10 billion in inflows into the country, but that has yet to materialize. A scheme in which the state oil company promised oil in exchange for dollars from the African Export-Import Bank (Afrexim) earned Nigeria $3 billion last month.
A senior Western diplomat whose country has companies operating in Nigeria told the Financial Times that businesses remain unconvinced by government announcements of potential dollar inflows to ease the widespread shortage of hard currency.
During a visit to Nigeria last week, US Secretary of State Antony Blinken said the inability to repatriate capital was a “hurdle” for US investors maximizing opportunities in Nigeria.