CBN Devalues Naira – New Exchange Rate Revealed
The Central Bank of Nigeria (CBN) has devalued the Nigerian Naira, leading to a significant drop in its value. The naira now stands at a record low of 29% to N664 per dollar, the biggest devaluation since 2016.
The Central Bank of Nigeria’s Shocking Devaluation of the Naira
In an unexpected development, the Central Bank of Nigeria (CBN) announced the significant devaluation of the Nigerian Naira just two weeks after denying such plans.
This announcement signals a shift in the nation’s foreign exchange (FX) market, uniting all segments into the Investors and Exporters (I&E) Window as had been suggested in earlier reports contested by the CBN.
Swift Fall of the Naira
This change has spurred the Naira’s sharp plunge, hitting a historical low of a 29% drop to N664 per dollar at the Lagos business closing time. It is the steepest decline since the devaluation in 2016.
“The changes reflect the tumultuous landscape of the Nigerian FX market and signal an effort to regain control.”
New Rules and Adjustments by the CBN
In a recently released circular, the CBN unveiled a set of new regulations and adjustments:
- Applications for medical expenses, school fees, BTA/PTA, and SMEs will continue to be processed via deposit money banks.
- The reimplementation of the “Willing Buyer, Willing Seller” model in the I&E Window, with all eligible transactions accessing foreign exchange through this window.
- Trading limits on oversold FX positions, with short positions allowed to be hedged with OTC futures. Overbought positions were capped at zero.
- The reinstatement of order-based two-way quotes with a bid-ask spread of A1, ensuring all transactions are cleared by a Central Counter Party (CCP).
The following schemes will also be discontinued effective June 30, 2023:
- RT200 Rebate Scheme
- Naira4Dollar Scheme
Exchange Rate Developments
The CBN, which previously auctioned the naira at over N630 to the dollar at the SMIS window, now instructs commercial banks to freely trade the dollar, thereby increasing prices to N750/$.
Investors responded with enthusiasm to these reforms, illustrated by the stock market and government bonds surge. The lifting of trading restrictions on the official market led to the Naira plummeting to a record low of 750 to the dollar. This significant drop is the first since the introduction of a managed exchange rate in 2017, following the 2016 devaluation.
Economic Opinions on the Devaluation
Charlie Robertson, FIM Partners’ head of macro strategy, views this devaluation as a crucial step towards enhancing the current account and long-term investment climate. President Bola Tinubu, who spearheaded these reforms, inherited an economy grappling with sluggish growth, towering debt, and dwindling oil production.
“Foreign investors had seen forex restrictions as a significant barrier to investing in Nigeria, Africa’s top oil producer,” explained Bismarck Rewane, CEO at Financial Derivatives Company.
He further expressed optimism that eliminating distortions in forex pricing would enable the Naira to find its true value in the coming weeks.
While many expected the new administration to liberalize the Naira, the extent of the decline came as a shock. Nonetheless, the devaluation is viewed as a tool for helping the federal government to improve its financial balance, given its reliance on USD-linked oil revenue.
While experts advocate for the unification of exchange rates to create a transparent forex market, concerns have been voiced about potential impacts on the overall price level. The current weak economic fundamentals and limited forex sources in Nigeria underscore the necessity for a gradual approach.
Economists predict that the exchange rate may oscillate in the short term due to high demand backlog. However, they anticipate a moderation as market conditions stabilize. As Nigeria navigates this new financial landscape