Naira Loses 40% In A Single Day In Africa’s Top Economy
From Business Insider. Story by Will Martin.
The Nigerian naira fell off a cliff on Monday morning after the Central Bank of Nigeria removed the currency’s peg to the dollar.
The move was an attempt to devalue it in response to tumbling oil prices.
As trading opened for the day, the naira dropped more than 4 percent against the greenback, hitting 280 naira per dollar.
The removal of the naira’s peg against the dollar was announced on Wednesday last week, after long-term speculation about whether or not it may happen.
The Central Bank of Nigeria said that it would move to a purely market-driven currency system to help Africa’s biggest economy cope with the effects of the global oil price slump in the past couple of years. Prior to the peg being taken away, the naira broadly traded at around 197 per $1.
In the short-term, the move is expected to be painful, but a 30 percent fall is probably a bigger move downwards than had been expected. Long-term however, the naira floating freely will likely be a net positive to the country’s economy.
“Over the long-run, a weaker currency will help Nigeria’s economy by encouraging import substitution and attracting foreign investors, who have shunned the country for fear of a devaluation,” wrote Capital Economics’ Africa economist John Ashbourne in a note sent to clients last week.
“This will release a pressure valve for the economy. We see the economy beginning to thaw and green shoots emerge possibly as soon as a year from now. Before then, we believe the macro picture will deteriorate,” said Yvonne Mhango, an analyst at Renaissance Capital, in a Bloomberg interview.
Analysts have long argued that Nigeria would eventually have to capitulate and devalue its currency given that the government’s controversial agenda of currency and price controls created a bunch of economic stresses in Africa’s largest economy. Most recently, inflation soared to a six-year high. As a result, last Wednesday’s announcement was widely expected.
Devaluing the naira is a step towards helping to fix Nigeria’s stalling economy, but it won’t solve all its problems. The country saw its economy shrink by 0.4 percent in the first quarter of 2016, and continues to suffer turmoil when it comes to fuel shortages, along with disruption to the oil industry because of a rebel group known as the Niger Delta Avengers. The country faces a “full-blown economic crisis,” Ashbourne said.
Despite these issues, rating agency Moody’s sees the move as a net positive for Nigeria.
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