The naira plunged to a new record low on Friday, breaking past 300 per dollar for the first time as the Nigerian currency begins a sudden slide a month after its long-awaited free float.
In June the Central Bank of Nigeria finally allowed the currency to float freely, and it immediately plunged 40 per cent, from 198 to 283 on the first day of the new regime, report Joel Lewin and Roger Blitz in London.
But after the initial plunge, the currency stabilised abruptly and hardly moved for three weeks, leading analysts to assume the central bank was still keeping a tight grip on the currency.
That stability lasted until this week, during which it has skidded more than 8 per cent against the dollar, setting new record highs almost every day.
And today the slide has accelerated. At pixel time the naira is down 4.5 per cent against the greenback at an all-time low of 305 per dollar.
Devaluation day aside, that’s the biggest one-day plunge since 2009.
What gives?
“They said they were going to move to a free float, but then it just stuck- it’s not a free float at all,” says William Jackson, a senior emerging markets economist at Capital Economics.
“Despite the initial 40 per cent drop, the naira is still overvalued. There is still a divergence between the official Naira rate and the parallel, black market rate,” he says, adding that the official rate needs to fall further to bring the two into balance.
Despite the free float, there are still restrictions on foreign currency in place. Some analysts suggest the shortage of dollars has contributed to the sharp moves seen this week.
A number of factors are driving demand for dollars, according to researchers at Ecobank, including Nigerians taking holidays, but implementation of the central bank’s new policy of a single foreign exchange structure and floating exchange rate is proving difficult.
“Despite the policy change, a parallel market currently still exists, suggesting the NGN is still overvalued,” said Ecobank in a note earlier this week.
Standard Bank said the shift to a free floating regime was in progress “albeit haltingly”. New regulations were introduced last month, but the bank believed market participants were unconvinced the CBN would be indifferent to any exchange rate level.
“While the country has large trade deficits, only an influx of capital flows, perhaps led by portfolio inflows, will lead to a normalisation of the FX market, we believe,” said Standard Bank.
Last summer the central bank took a rather micro approach to propping up the ailing currency. It banned Nigerians from buying foreign currencies to pay for a diverse range of goods, including margarine, wheelbarrows, aeroplanes, cement, head pans, tinned fish in sauce, and bonds.
And toothpicks.
