Nigeria’s central bank has announced the elimination of the country’s multiple exchange rate system and the adoption of a floating exchange rate for the Nigerian currency, the naira.
This move comes as President Bola Ahmed Tinubu initiates a series of monetary policy changes to revitalize Nigeria’s economy.
Economists, as well as the World Bank and IMF, have long urged Nigeria to abandon the complex exchange rate mechanism and capital controls that were implemented under former President Muhammadu Buhari. The aim is to encourage investment in Africa’s largest economy and its leading oil producer.
In a statement released on Wednesday, the Central Bank of Nigeria declared the end of the “segmentation” of foreign exchange markets. Going forward, all transactions will be conducted through a single category known as the “Investors and Exporters” window. Additionally, the naira will be traded at a market rate determined by the willingness of buyers and sellers, replacing the previous regulated rates against the US dollar and other currencies.
The central bank’s statement, posted on its website, stated, “All segments are now collapsed into the Investors and Exporters window.”
Last week, the official exchange rate of the naira stood at approximately 460 to the US dollar. However, at the close of official trade on Wednesday, it had depreciated to around 660 to the dollar, according to local traders and analysts.
“This is effectively both a devaluation as well as a deregulation,” explained Tunde Ajileye, an analyst at Nigeria’s SBM Intelligence. “Many of the market distortions that arose from the central bank and the Nigerian government’s attempts to control the foreign exchange price will now be eliminated. So, this is a positive development.”
The previous controls had led to a backlog of demand for foreign currency and the flourishing of a black market or parallel trade, where the naira was being sold at around 750 to the US dollar. Foreign airlines operating in Nigeria frequently complained about their inability to repatriate millions of dollars in earnings due to these controls.
The overhaul of the foreign exchange system is just one of the many decisions made by President Tinubu, the former governor of Lagos State, since assuming office two weeks ago. He pledged to implement reforms to rejuvenate the economy of Africa’s most populous nation.
On his May 29 inauguration, Tinubu put an end to Nigeria’s long-standing petrol price subsidy, which had artificially kept prices low but cost the cash-strapped government billions of dollars. As a result of this measure, fuel prices nearly tripled across Nigeria. Most analysts agree that this step was necessary to reduce government spending.
A week ago, Tinubu’s administration suspended the central bank chief, who was later detained by domestic security services as part of an investigation into his tenure. On Wednesday, Tinubu also suspended the country’s anti-corruption chief, who is being investigated for allegations of abuse of office.