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HomeBusiness NewsNigeria weakens naira for investors but may struggle to draw inflows, analysts...

Nigeria weakens naira for investors but may struggle to draw inflows, analysts say

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Nigeria has weakened the naira for investors but it may still struggle to attract dollars unless it scraps its system of multiple exchange rates, analysts said, doubting funds will flow back after central bank’s latest currency moves.
The central bank said on Monday it would allow investors to trade the naira at rates determined by the market – a move intended to improve the supply of dollars, but one that introduced yet another exchange rate.

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Nigeria already had five rates: the official rate, the black market, a rate for Muslim pilgrims going to Saudi Arabia, a retail rate set by licensed exchange bureaus and a rate for foreign school fees.
The naira eased 18.3 percent to 374.25 to the dollar for investors on Tuesday compared with the official interbank rate of 305.90 and black market rate of 385.
“The move … is unlikely to … attract sizeable inflows until there is harmonisation between the different markets,” said Razia Khan, Africa chief economist at Standard Chartered Bank.
The stock market which has languished as foreign investors fled, welcomed the move, gaining 0.4 percent Tuesday after rising more than 2 percent the previous session.
However, the new policy will mask pressure on the naira as the central bank tries to avoid a currency devaluation.
The International Monetary Fund has urged Nigeria to scrap its multiple exchange rate regimes to revive its economy, which is in its second year of recession.
“The central bank is seeking to fine-tune its FX policy without a fully fledged devaluation, (but) the proof will be in the pudding,” said Aly-Khan Satchu, head of Nairobi-based Rich Management.
Nigeria is battling a currency crisis brought on by low oil prices, which has tipped its economy into recession and created chronic dollar shortages. It wants to attract foreign investors and at the same time maintain a strong naira to ward off inflation.
The central bank last year removed a temporary peg to float the currency, but to protect its precariously low foreign reserves it introduced the convoluted exchange rate system that sees different buyers paying various rates for dollars.
The bank has been using the forward market to meet dollar demand, making only tiny volumes available on the spot market and using those sales to influence the naira’s official value in a bid to narrow the currency spread with black market rates.
“The segmentation of forex demand through the adoption of multiple FX arrangements impedes the exchange rate from reaching true equilibrium,” said Cobus de Hart, senior economist at NKC in Johannesburg. “Weak central bank credibility will unfortunately not help matters much, with the bank backtracking on previous decisions on numerous occasions in the past.”
© Reuters News

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