Nigeria made another steep devaluation of its currency this week — the second in eight months. This happened after FMDQ OTC Securities Exchange, a market regulator, announced that it had changed the methodology for calculating closing rates on Friday. The revised exchange rate system, which FMDQ began publishing this week, will ensure that “rates accurately reflect market conditions while upholding price formation and transparency”, the firm said.
Now, the naira has hit a new all-time low of N1,482.57 at the official markets. The central bank has blamed inadequate dollar liquidity for exacerbating the volatility and promised to boost supply to clear a backlog of foreign exchange demand. It owes about $5bn in mature forward contracts. But there’s an end goal with this current move: to lure investors into the market.
The naira has lost around 40% since the start of the year. But it has also become closer to the parallel market prices recently. Many see this move as part of market-friendly reforms that can restore investors’ confidence in Africa’s largest economy. Since the Central Bank of Nigeria disposed of its fixed exchange rate system, it has been difficult to unite official and parallel rates. This made operations expensive for multinationals, forcing some of them to leave the country last year. Businesses, and even the government, find it hard to budget and plan because of these varying exchange rates.
But will this devaluation make things any better? That’s still up for debate. It’s not just the naira’s volatility that’s spooking investors. It’s also that the policy regime is patchy, and there’s too much uncertainty. For instance, in June 2023, the central bank announced letting the naira trade freely until it found a new market-related level. However, they didn’t really let the currency go and tried limiting its depreciation. As a result, the supposed float turned out to be nothing more than a one-off devaluation. The central bank also retained an official exchange rate at which it supplied dollars to a few customers. That meant the multiple rate system the reforms ought to have disbanded continued in practice.