Nigeria’s latest attempt to ease the dollar shortage choking its economy is dependent on traders trusting the central bank.
The monetary authority opened a foreign-exchange window for investors and exporters Monday where the naira trades between the interbank rate and the black-market rate, which many Nigerians use to access dollars.
In the weeks before the opening, Governor Godwin Emefiele told senior bankers that he would tolerate a weaker naira and allow the market to determine the rate within the new window, according to a person who attended the meetings.
While the initial market reaction showed investors are optimistic the platform will be successful in bringing hard currency into Nigeria — bank stocks rose and naira forward contracts priced in a weaker currency – policy makers still must demonstrate that they’ll allow free trading. Investors have been disappointed before.
Last June, the central bank ended a 16-month currency-peg and promised to float the naira, but it has traded near 315 per dollar since August. That’s about 25 percent stronger than its black-market price of 390.
“If this is going to be market-determined, that would be a great positive,” said Razia Khan, the chief Africa economist at Standard Chartered in London. “Given the false start we had in June last year, there’ll be a certain amount of caution initially.”
Standard Bank Group analysts expect an initial “sharp but unsustainable” decline in the naira as investors and companies try to clear their unmet demand for dollars of about $4 billion.
If that happens, the central bank may start manipulating the rate again, which would discourage inflows.
“What is on paper may not actually be what is practiced,” Standard Bank’s Lagos-based Ayomide Mejabi and Phumelele Mbiyo in Johannesburg said in a note Monday.