Nigeria: Central Bank devalues naira again
On 30 January, the Central Bank of Nigeria (CBN) changed the method for calculating the daily official exchange rate, effectively devaluing the naira. On that day, it traded at NGN 1,192 per USD, 25% weaker than on the prior day. The naira subsequently traded at fresh all-time lows, significantly closing the gap with the parallel market rate. On 16 February, the currency traded at NGN 1,537 per USD, depreciating 44.5% month on month. This followed June 2023’s sharp devaluation, which immediately brought the official exchange rate from NGN 463 per USD to NGN 623 USD; the naira lost further ground in H2 2023, hovering between NGN 800–1,000 per USD in recent months.
January’s sharp devaluation was yet another attempt by the Nigerian authorities to liberalize the FX market and stabilize the ailing currency. The Central Bank changed the system for setting the daily official exchange rate, eased rules on international money transfers and clamped down on both currency speculation by banks and traders’ deceptive price reporting. These changes aim to make Nigeria a more attractive destination for foreign exchange inflows in a bid to tackle dollar scarcity and stabilize the naira.
A weaker naira is set to fuel price pressures in the coming months through higher imported inflation, which will weigh on domestic activity and exacerbate the cost-of-living crisis. That said, in the longer term, it should lead to more consistent inflows of foreign currency and investment, boding well for economic growth.
The outlook for the naira remains highly volatile. Changes to Central Bank interventions in the foreign exchange market will be key. If the CBN were to maintain a tight grip on the currency, foreign investor sentiment would falter, and a significant gap with the parallel market rate could re-emerge. Monetary policy under the new inflation-targeting framework is another crucial factor to monitor: The CBN is set to meet on 26–27 February for the first time since July 2023. All our panelists expect the Bank to hike rates in Q1 to tame near-three-decade-high inflation and provide some support to the naira by shoring up investor sentiment.
Analysts at the EIU commented on the outlook:
“Persistently high inflation, incoherent monetary policy, low foreign reserves and lingering de facto capital controls will continue to sap confidence in the apparent near-float of the naira implemented in February 2024. Traders will continue to be concerned that controls on the currency could be tightened at any point. An important factor in supporting the new exchange-rate system will be its impact on foreign exchange reserves.”