Buharinomics: Techinical Devaluation To Cause Nigerians Short-Term Pain – Analysts

As the central bank prepares to abandon the peg on the Naira, and allow for a more liberal exchange rat policy, Nigerians should be prepared to experience some short term economic discomfort, according to analysts.

Sequel to the Monetary Poicy Committee meeting that held Tuesday, international business publication, Bloomberg reported the views of several local and international finance and economic experts.

Bloomberg reports:

In a retreat for President Muhammadu Buhari, who has resisted calls to let the currency weaken, Central Bank of Nigeria Governor Godwin Emefiele said Tuesday the Abuja-based bank would release details of a “flexible” exchange-rate framework “in coming days.”

The central bank will probably introduce a dual-rate system, with the naira trading at a market-related level while the central bank continues to make foreign-currency available to some importers at a fixed rate, according to Renaissance Capital Ltd. The bank has pegged the local unit at 197-199 per dollar since March 2015, deepening an economic slump caused by the plunge in oil prices.

“It looks like the most investors could have hoped for from the CBN,” Charles Robertson, the London-based chief economist at Renaissance, said by phone. “If my interpretation’s right, they’re not going to throw away their reserves trying to manage the exchange rate and they’ll let the market determine that exchange rate.”

“It is a technical devaluation,” Ayodeji Ebo, head of research at Afrinvest West Africa Ltd., said by phone from Lagos. “The objective is clear. It will open up the foreign-exchange market, once there is liquidity.”

The central bank would make dollars available to companies importing “critical” materials, while others would have to buy foreign currency in the market, Emefiele said. Details of how the new system will operate have yet to be determined, he said.

“They’ll allocate dollars to those key sectors that will help Nigeria change the structure of its economy, probably agribusiness, industry and oil refineries,” Robertson said. “It sounds like the right policy stance to get Nigeria working again, although they’ll be an inevitable lag as devaluation always carries some short-term pain.”