The Naira tumbled on Monday as the Central Bank of Nigeria (CBN) ended a 16-month-long currency fix that caused investors to flee and sent the economy to the brink of a recession.
The Naira fell 24 percent to a record 260.5 versus the dollar, from Friday’s rate of 199, before paring the decline to trade 23 percent weaker at 257.75 by 11:28 a.m. in Lagos, the commercial capital.
The Naira was quoted at 254 when the interbank foreign-exchange market opened on Monday, removing the peg of 197-199 that the CBN had in place from February 2015. It could weaken further as trading increases, according to analysts including Standard Chartered Bank.
There may be “higher volatility until the market becomes more functional,” Samir Gadio, head of Africa strategy at Standard Chartered in London, said in an e-mailed response to questions. “Foreign investors will need to be convinced that the new foreign-exchange platform is sustainable before they resume the purchase of local assets.”
The CBN used capital controls to stem an outflow of dollars after it crashed to a record in February 2015 as oil prices slumped. While stabilizing the currency, the controls deterred foreign investors and starved manufacturers of foreign currency needed to pay for raw materials and equipment.
Few trades went through in the hour or so after the market opened, making it hard to tell what the naira’s fair value is, according to Craig Thompson of Nyon, Switzerland-based brokerage Continental Capital Partners SA. The central bank seems to want to stabilize the currency at around 250-260 per dollar and most local banks will be nervous about pushing through trades much weaker than that, he said.
While allowing the naira’s exchange rate to be “market-driven,” the CBN would intervene as when necessary, Governor Godwin Emefiele said when he announced the new system on June 15.
“I think it will move to 300 at some stage,” Thompson said by phone. “There’s all that pent up demand. But you don’t want to be seen by the central bank to be pushing it lower. It won’t sit well. There’s a bit of moral suasion to keep it here. But as the client orders come through, the banks will have to pay up to supply their clients.”
Forwards markets suggest the depreciation has much further to go. Three-month naira non-deliverable forward contracts rose 1.7 percent to 325.5 against the dollar, while one-year contracts climbed 1.1 percent to 358, heading for a record close.