Nigeria starts slowly to close huge gap between its FX rates

Nigeria may have begun taking the first tentative steps to close the disruptive gap between the official rate and the parallel rate which many see as better value of the Naira, the beleaguered currency of Africa’s most populous nation.

The initial move to weaken the Naira began quietly last week and although the currency showed signs of recovering from a record low on Thursday, Nigeria’s finance minister Zainab Ahmed says to expect further weakening of the Naira.

The naira gained 0.0367% to 435.84 on the spot market as of 5:30 p.m. in Lagos on Thursday, after recovering from a record low of 436 naira to the greenback on Wednesday.
According to Bloomberg, Nigeria’s currency is likely to weaken even further, Minister of Finance Zainab Ahmed, said in an interview from Egypt’s new administrative capital. “It will happen with time,” she said, without giving any timeline.

Nigeria’s state governments are running out of cash to pay the salary of their workers and some have said that long arrears of unpaid staff salaries could spark a series of huge unrest capable of disrupting crucial elections in February next year.

A 10% movement on the official rate could add about N60bn monthly to what is available in FAAC for allocation to the three tiers of government in Nigeria.

In her interview, Ahmed also ruled out Nigeria taking on an International Monetary Fund program to address the country’s fiscal challenges, which include plummeting revenues and rising debt service costs.

Read also: Nigeria inches towards IMF bailout on mounting debt

Africa’s largest economy maintains multiple exchange rates dominated by a tightly controlled official rate and the unauthorized parallel rate at which many Nigerian get dollars, which is roughly 60% weaker.

The World Bank and IMF have urged Nigeria to unify its rates.

The weakening of the official rate “looks more like a gradual and partial convergence to higher effective exchange rate levels as the central bank already sells USD to corporates at up to 465 naira on the spot market and auctions for small firms,” said Samir Gadio, head of Africa Strategy at Standard Chartered Bank.

Gadio added that it was unlikely the outgoing government would adjust its official rate ahead of February’s presidential election.

Some analysts say the government should be aiming to abolishing the multiple exchange rates instead of embarking on a slow grinding process that will further damage the economy.