Nigeria’s central bank took a step nearer to outright devaluation of the naira currency on Tuesday, providing 23 commercial banks with a combined $370.8 million at forward exchange rates up to 15 percent weaker than the official rate.
On Monday, the central bank effectively devalued the local currency for private individuals, who account for about 20 percent of total foreign exchange demand in the country.
On Tuesday, it said it sold dollars using one- and two-month forward exchange rates to commercial banks whose bids ranged from 315 naira to 360 naira per dollar, up to 15 percent weaker than the official rate of 305 naira that commercial importers typically use. Forward exchange rates are rates at which banks agree to exchange one currency for another at a future date.
Selling the dollars at new one- and two-month forward rates may set expectations for the central bank to allow the naira to trade at a weaker level in the future, after the government had kept it at an artificially strong value according to critics.
Banks bought $216.5 million in one-month forwards, and $154.3 million in two-month forwards, said the central bank. Nigeria’s dollar supply has been throttled by foreign currency restraints and low exports of crude oil. The government devalued the naira last June but still kept it at just over 300 to the dollar – as much as 40 percent stronger than black market rates in the following months.
Despite calls from businesses and economists, the government had refused to take steps to devalue the naira further until now, while President Muhammadu Buhari, a staunch opponent of devaluation, has been on medical leave in Britain for over a month.
On Monday, Nigeria weakened the naira rate for private individuals days after a top advisory body demanded an urgent review at a meeting chaired by Vice President Yemi Osinbajo, who is currently acting president.
It was Osinbajo who unveiled the idea of a more flexible exchange rate last year, also while Buhari was on medical leave, leading to a 30 percent devaluation weeks later.
In Tuesday’s statement, the central bank said it had offered $500 million to banks, “but not all of them provided enough naira backing to pay fully for their respective bid amounts”.
The central bank said it was “more than ever ready to support the inter-bank market by ensuring liquidity and transparency to guarantee efficiency in the Forex market.”