NIGERIA’s central bank is “reasonably optimistic” the naira will settle at around 250 to the U.S. dollar after an initial period of weakness following a flotation on Monday, the bank’s governor has said in a letter to President Muhammadu Buhari.
Nigeria’s central bank said on Wednesday it would begin market-driven foreign currency trading next week, abandoning the peg of 197 naira per dollar that it has supported for 16 months.
Foreign investors and economists have called for months for a devaluation as chronic foreign currency shortages choked economic growth and deterred investment.
The naira is expected to fall sharply when interbank trading begins on Monday, but the central bank said it did not have a target for the currency and the price would be “purely” market-driven. The naira was trading on the black market at around 370 to the dollar on Thursday.
Giving the first indication of a target, Governor Godwin Emefiele said in a June 3 letter to Buhari — seen by Reuters — that the central bank hopes the naira will eventually trade at around 250 per dollar, a level the president has “approved”.
“I must assure Your Excellency that we are indeed reasonably optimistic that at some point the rate will settle around 250 naira,” Emefiele says in the letter.
The letter, which briefs Buhari on the foreign exchange plan announced on Wednesday, says it could take three to four weeks to clear a $4 billion backlog of foreign exchange demand.
Buhari has for months said that he does not want the naira to be devalued, but backed a more flexible exchange rate policy when the central bank outlined its plans in May, without elaborating.
The presidency has not commented on the new regime, with Buhari’s spokesman declining to comment when Reuters called on Wednesday.
The central bank could not be immediately reached for comment.
Africa’s biggest economy, which contracted by 0.4 percent in the first quarter, faces its worst crisis in decades after the decline in oil prices since 2014 and last year’s introduction of a currency peg, which prompted a large-scale capital flight.
With a likely sharp fall for the naira, Nigerian products will become relatively cheap and imports more expensive, which should stimulate the domestic economy but also lift inflation.
Buhari has previously raised concerns about the inflationary impact that a weaker currency will have on Nigeria’s poor.
Nigeria, Africa’s largest crude exporter, has resisted devaluing its currency for more than a year despite other major oil producers, including Russia, Kazakhstan and Angola, allowing currencies to fall after crude prices collapsed.
The Naira on Thursday dropped against the United States dollar as it sold for N370 to a dollar on the parallel market.
This is even as the Central Bank of Nigeria (CBN) did not do any new dollar-naira trades on the interbank market on Thursday.
Reuters quoted a CBN official as revealing that the apex bank did $13.6 million of carryover trades at about the pegged rate of N197.5 to a dollar.
CBN, on Wednesday, said it would begin open-market foreign currency trading next week, abandoning its 16-month-old peg against the dollar.
Dealers said they expected no interbank currency market activity until the new trading regime starts on Monday.
Meanwhile currency dealers at the unofficial market confirmed that the new policy has had an adverse effect on the Nigerian currency already as new rates have emerged.
“With the new policy now, there are going to be fluctuations but we are sure that the CBN has done what it considers the best for the country,” a source informed.
In the same vein, Nigerian Interbank Treasury Bills True Yields (NITTY) increased across the maturities on low level of activity as yields on one month, three months, six months and 12 months rose to 2.73 per cent, 7.55per cent, 9.82per cent and 12.53 per cent respectively.
Also, the Nigerian Interbank Offered Rates (NIBOR) increased across most of the tenor buckets on liquidity strain – NIBOR for overnight and one month, three months and six months rose to 8.38 per cent, 12.05 per cent and 13.66 per cent respectively.