Nigeria's unfree float leaves questions hanging

By Rachel Savage

The naira is behaving more like a free-floating currency these days.

Nigeria’s central bank had kept a stranglehold on the supply of dollars, and the rate at which they could be legitimately traded. Then in April, it allowed investors and exporters to trade foreign exchange in a market-determined window and in August, the so-called Nafex rate was merged with the interbank rate.

Nigeria’s stock market has risen nearly 50% since April as foreign investors warmed to the new regime, while yields on government Eurobonds have fallen. But multiple official FX rates, whether for pilgrims or petroleum marketers, remain in place.The currency restrictions have exacerbated Nigeria’s economic crisis since oil prices fell in 2014. Importers struggled to get the dollars they needed and imports fell by a third in 2016. Investors, unsure of whether they would be able to repatriate profits, pulled out.  “We wouldn’t have seen such a sharp fall-off in investment inflows into Nigeria if the currency had been allowed to weaken… if there was clarity around the FX framework,” says Yvonne Mhango, head of sub-Saharan Africa research at Renaissance Capital.

The policy response to the oil crash has mirrored president Muhammadu Buhari’s first stint in power as a military dictator in the 1980s, when he resisted an IMF-advised devaluation. The central bank freed the naira from its peg of N197 to N199 to the dollar in June 2016 but quickly pinned it again at around N305 when it became obvious the currency had further to weaken. The feeling in the local financial community is that central bank governor Godwin Emefiele, while nominally independent, acquiesced to Buhari’s desire for a strong naira.

By the middle of February this year, the naira was trading at N520 to the dollar on the black market, 70% weaker than the official rate. At that point the central bank started selling more dollars to bring the black market rate down to below N400. It had more freedom to move as reserves had risen from $23.9 billion in October 2016 to above $29 billion after militants in the oil-producing Niger Delta stopped attacking production facilities and pipelines, allowing oil exports to pick up.

The Investors and Exporters FX Window was introduced on April 24 and within a month the Nafex rate, set at midday, had effectively converged with the black market rate at between N360 and N370 naira to the dollar. By August, around $2.7 billion had come into the country through the window, according to Bola Onadele, managing director of FMDQ OTC securities exchange, which hosts the trades. In comparison, the central sold about $4 billion between January and July.

By this stage, banks were also finally allowed to acknowledge the real value of currency trades they were making and quote the Nafex rate rather than the official interbank rate, which had been around N315 to the dollar.

Yet Nigeria still has multiple exchange rates – as many as 10, according to Capital Economics – so there will continue to be uncertainty about the future of the more flexible currency regime as an inflation rate of more than 16% puts further pressure on the currency.

“The cost of maintaining this sort of arrangement would increase significantly if the gap between the [Nafex and official] rates were to be wider than now,” says John Ashbourne, economist at Capital Economics. “As long as they maintain the multiple track system, that’s going to put a few people off [investing in Nigeria], because you just don’t know how the whole thing eventually crystallizes into a permanent arrangement." 

The different rates also provide both a subsidy and an opportunity for arbitrage, known as ‘round-tripping’ in Nigeria, although it is impossible to tell to what extent investors are doing this

Petroleum marketers can buy dollars using a rate of N285 whereas since May 2016 international oil companies have had to sell dollars at the official exchange rate as part of government policy to fix fuel prices at N145 a litre. In August, companies including manufacturers and airlines could still buy dollars from the central bank at N320 via their weekly Secondary Market Intervention Sales, according to local press. Earlier this year, Nigerian pilgrims to Jerusalem and Mecca reportedly got a rate of just N197.

“This time round it’s not the federal government underwriting the fuel subsidy, but the market stakeholders providing the subsidies,” says Onadele. 

“If the system was working, the right decisions would have been taken,” he adds. “When we start having market-oriented leadership… we probably will get to these right decisions.”