Nigeria Signals Preference for Weaker Naira Exchange Rate
Nigeria is selling dollars at less than the official rate, signaling that it would prefer a weaker currency.
The Abuja-based Central Bank of Nigeria has been selling the greenback at 444 naira per dollar to investors for almost three weeks, while the official spot rate is about 415 naira to the greenback, according to traders.
“The consistency of the interventions at the 444 naira-per-dollar levels likely indicates that this is a preferred level if the CBN decides to devalue the naira,” Lagos-based Chapel Hill Denham said in a note to clients Monday.
The central bank has devalued the currency three times since March last year after lower oil prices put pressure on dollar reserves and prompted the regulator to ration foreign exchange. There’s been no official announcement about plans for a fourth devaluation although the bank may provide guidance when it delivers an interest-rate decision on Tuesday.
A successful $4 billion Eurobond raise in September has bolstered the central bank’s reserves to about $41.4 billion, giving it more fire power to intervene in the foreign-exchange market.
The bank has increased the volume of the greenback sold to foreign investors in a bid to clear a backlog of dollar demand that has built up since last year after crude prices collapsed. While oil contributes just over 7% to Africa’s top crude producer’s gross domestic product, it accounts for nearly all foreign-exchange earnings and half of government revenue.
Selling dollars to foreign investors at elevated rates makes sense for the central bank as it doesn’t have an infinite amount of reserves, said Mohamed Abu Basha, head of macroeconomic research at Cairo-based EFG Hermes.
“We should see CBN weakening the overall investors and exporters window rate towards 430 to 440 as they need such a move to preserve their reserves with the economy gradually recovering from its lows,” he said.
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