For decades, multiple exchange rates had led to foreign currency shortages that worsened under suspended central bank governor Godwin Emefiele.
Nigeria’s central bank allowed the naira currency to drop as much as 36 percent on the official market on Wednesday, days after President Bola Tinubu suspended the central bank governor who oversaw much-criticised multiple exchange rates.
For decades, multiple exchange rates had led to foreign currency shortages. Under suspended apex bank chief Godwin Emefiele, the situation worsened, making it difficult for investors to take out money from Africa’s biggest economy.
Traders told the Reuters news agency the central bank had removed trading restrictions on the official market, which drove the naira to a record low of 750 to the dollar on the official market, down from Tuesday’s low of 477 naira to the dollar.
The new rate is equivalent to the black market rate which has stood at approximately 750 to the dollar since last year.
This was the first time since 2016 that the naira had recorded a big fall on the official market before the central bank introduced a managed exchange rate in 2017.
Charlie Robertson, head of macro strategy at FIM Partners, said, “A much-needed devaluation which takes the currency from 50 percent overvalued to about 5-10 percent [cheaper]. This should improve the current account and improve the long-term investment climate.”
The central bank did not immediately comment.
Tinubu inherited anaemic economic growth, record debt and shrinking oil output and has promised to reset the economy. He has also said some decisions including removing a popular petrol subsidy would impose an extra burden on citizens but free up money for education, regular power supply, transport infrastructure and healthcare.
Foreign investors had flagged the forex restrictions as one of the biggest impediments to financing in Nigeria, Africa’s biggest oil producer.
Unifying the exchange rate and scrapping the subsidy were the most immediate tasks that Tinubu faced. Delivering these within the first two weeks of his presidency has been well received by investors and economists.
“What we are seeing is the removal of distortions created by inefficient pricing of foreign exchange and in the next few weeks we should start seeing the naira finding its level,” Bismarck Rewane, CEO of Financial Derivatives Company.
Nigeria’s sovereign dollar bonds surged as much as 2.7 cents on the dollar on news of the devaluation, with longer-dated maturities rising the most, according to Tradeweb data.
The local banking index earlier surged 23 percent to a more than 20-year high, after Emefiele’s suspension.