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EXPLAINER-Why Nigeria's central bank won't ease its grip on the naira - REUTERS

MAY 15, 2021


Nigeria is keeping control of its naira currency despite demands for deeper reforms from the International Monetary Fund and World Bank and complaints from businesses.

ABUJA, May 14 (Reuters) - Nigeria is keeping control of its naira NGN=D1 currency despite demands for deeper reforms from the International Monetary Fund and World Bank and complaints from businesses.

The multilateral institutions say a free-floating naira would help Africa's largest economy withstand future shocks. But Nigerian authorities fear inflation stemming from a sharp devaluation could throw millions into poverty.

The central bank has opted for a gradual weakening of the currency. The naira fell to a record low on the official market in May after lenders traded it almost 8% weaker against the dollar.

What is happening to the naira, and why? Here are some key facts about Nigeria's currency and recent monetary policies:


The COVID-19 pandemic and oil price crash hammered Africa's largest economy, 90% of whose foreign exchange earnings come from oil exports, pushing it into its second recession in four years.

It narrowly exited the recession in the fourth quarter, but the drop in oil revenues led to a balance of payments deficit of $14 billion last year and has depleted its foreign reserves.


The government of President Muhammadu Buhari, who took office in 2015, has kept the currency artificially high as a matter of national pride.

During the last oil price crash, in 2016, the Nigerian central bank created a system of multiple exchange rates in order to avoid a large official devaluation. These included a market-determined rate for investors and exporters called the Nigerian Autonomous Foreign Exchange Rate Fixing (NAFEX).

Faced with a 5.6 trillion naira ($15 billion) budget deficit this year, the government is seeking a $1.5 billion loan from the World Bank. But in return, the World Bank wants Nigeria to do more to bring the official exchange rate of 381 naira per dollar and other rates, including NAFEX, into line.


Nigeria's central bank devalued the naira's official rate twice last year and has weakened the exchange rate for retail users.

The bank has continued to gradually adjust the currency since the devaluations, limiting dollar access for imports and implementing restrictive forex policies to support the naira.

After oil prices crashed in 2014-16, Nigeria raised interest rates to attract investors. But when crude prices plunged last year and foreign money fled, the central bank reduced yields on treasury bills in order to boost naira liquidity.


The naira's value and issues with dollar liquidity are major deterrents to business and investment in Nigeria.

Twelve-month non-deliverable forward contracts quote the dollar at 453/460 naira, which implies the local currency is currently overvalued by around 11%.

Nigeria's debt is among Africa's lowest-yielding, which the government is counting on as it seeks to cover this year's large financing needs via cheap local borrowing.

But historically low yields could mean renewed inflows will be deterred even if the currency issues are resolved. Foreign investors have dumped local assets because of the low yields.


The central bank has offered cheap credit to try to boost manufacturing and agriculture in order to cut imports. It has also eased rules on diaspora remittances to increase dollar liquidity.

Those measures have not boosted the economy so far, however, and Tellimer's Curran said the central bank has "effectively sacrificed growth at the altar of naira stability".

"This policy has failed to accomplish the stated goal of low and stable inflation, and instead has exacerbated price increases via FX shortages and parallel market depreciation," Curran added.

Without a significant oil price rebound, analysts say the cost of imports and of meeting offshore debt obligations will further deplete Nigeria's dollar reserves.

(Reporting by Chijioke Ohuocha, graphics by Libby George; Editing by Alexis Akwagyiram)

(([email protected]; +234 703 4180 621; Reuters Messaging: [email protected]))


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