Nigeria’s exchange rates unify amid managed float regime

Nigeria’s journey to a managed float system, conceived to merge its numerous exchange rates, gathered pace on Tuesday after the newly integrated official rate and the parallel market rate met at parity.

The development signals that a regime enabling market forces to largely set the price of the naira is in the offing.

The government had controlled the spot rate for years until last week, keeping it artificially strong and widening the gulf between it and the black-market rate to almost 60 per cent, a put-off for foreign investors, many of whom have exited the economy in droves.

The local unit closed trade at 756.61 to a dollar on the Investors & Exporters Window, according to data from FMDQ Securities Exchange’s website, appreciating 1.8 per cent.

However, it traded at around 757 on the parallel market.

Even as the move will wean the market of its dependence on government control and permit price discovery, a managed float still allows the Central Bank of Nigeria (CBN) to make occasional interventions, usually to avert volatility.

The convergence clears the path for monetary authorities to free up the supply of the greenback to the official market, where arrears of dollar demand from manufacturers and other end users have been clogging activity since the 2020 record oil crash battered the foreign exchange reserves of crude-dependent Nigeria.

“Airtel Africa welcomes these changes as a positive move towards a more stable Nigerian FX market,” the wireless operator said in a regulatory filing on Tuesday, referring to the decision by the CBN last week to abolish segmentation and collapse FX windows into one.

The currency reform fits into the “thorough housecleaning” of Nigeria’s monetary policy structure, promised by President Bola Tinubu at his inauguration last month.

“We are allowing the market itself to set a price,” Kingsley Obiora, a deputy governor of the CBN, told Bloomberg in an interview, saying further reforms to liberalise the market will follow soon.

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“There is no country in the world, even the US, that has a completely free float,” he added in defence of the policy path the apex bank is taking.

He is confident the exchange rate will arrive at its fair value soon, at which point liquidity will be guaranteed. He is also betting Nigeria’s GDP will expand 5 per cent or 6 per cent next year and to $600 billion to $700 billion by 2027, boosted by fuel subsidy removal and currency reforms.