Naira: CBN leaves rate unchanged as economy falters

Nigerian policy makers voted to allow “greater flexibility” in the foreign-exchange market, signaling they may abandon a currency peg they’ve held for 15 months that’s starved Africa’s biggest economy of dollars and slowed foreign investment to a trickle.

While stopping short of an outright devaluation of the naira, the Central Bank of Nigeria Governor Godwin Emefiele said the MPC had voted unanimously in favor of a more flexible exchange rate and would release details of the new framework “in coming days.” That may mean the bank is set to introduce a dual-rate system, with the naira trading at a market-related level while the central bank continues to make foreign-currency available to some importers at a discounted rate, according to Renaissance Capital Ltd.

“It looks like the most investors could have hoped for from the CBN,” Charles Robertson, the London-based chief economist at Renaissance, said by phone. “If my interpretation’s right, they’re not going to throw away their reserves trying to manage the exchange rate and they’ll let the market determine that exchange rate.”

Currency Peg

The central bank has pegged the local unit at 197-199 per dollar since March 2015 as the country struggled to cope with a plunge in oil prices that contributed to the economy contracting in the first quarter.  The devaluation is a climb-down for President Muhammadu Buhari, who has resisted calls to let the currency weaken since coming to power in May last year, likening it to “murder”.

The discounted naira rate would be available to importers who couldn’t source raw materials locally, Emefiele said. Six-month naira forwards jumped 2.2 percent to 275 per dollar, pricing in a devaluation of about 38 percent.

“They’ll allocate dollars to those key sectors that will help Nigeria change the structure of its economy, probably agribusiness, industry and oil refineries,” Robertson said. “It sounds like the right policy stance to get Nigeria working again, although they’ll be an inevitable lag as devaluation always carries some short term pain.”

The Monetary Policy Committee left its benchmark interest rate at 12 percent. Two of the 20 economists surveyed by Bloomberg predicted the decision, while the rest forecast the MPC would raise the rate by between 50 basis points and 250 basis points. The cash-reserve ratio was left unchanged at 22.5 percent.

Falling prices and production of crude, from which Nigeria derives up to 70 percent of state revenue, have caused the nation’s economic outlook to deteriorate as the government struggles to pay salaries and stimulate growth, forcing it to increase borrowing. Nigeria’s gross domestic product contracted by 0.36 percent in the three months through March from a year earlier as oil output slumped, increasing chances that the economy could enter a recession.

Risks to the economy remain tilted to the downside and previous rate decisions must have time to work through to the system, Emefiele said.