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NIGERIA HYPERINFLATION LOOMS AS CENTRAL BANK DEVALUES THE NAIRA

June 15, 2016 | Uhuruspirit

Nigeria's 500 and 1000 Naira bills



Nigeria will float its embattled naira currency, the Central Bank governor announced Wednesday after months of pressure to control a spiraling crisis in Africa's biggest economy.

The new system will come into effect on 20 June and is expected to lead to a significant devaluation of the naira.

Being a major oil exporter, Africa's biggest economy has taken a hit from the fall in commodity prices.

The fixed currency rate had created a vast black market for US dollars and squeezed the country's economy.

The naira is fixed at 197 to the US dollar, but the black market rate has soared to 370 in recent months.

The currency fix was introduced in February 2015 to stop the naira from falling when lower oil prices sparked trouble for Nigeria's economy.

But a prolonged period of holding a currency at an artificial level often has a disruptive effect as foreign companies become reluctant to import goods when they are paid at distorted levels.

Companies with naira earnings that the government has refused to allow them to repatriate will take a hit. International airlines are holding the equivalent of $600 million at the old exchange rate, according to the International Air Transport Association.

Instead of depleting its much needed (and virtually non-existent) foreign reserves, the Central Bank of Nigeria will select a group of around 10 primary dealers through which the naira will be traded. There will only be one exchange rate and the bank will intervene in the market “as the need arises,” Governor Godwin Emefiele told reporters in Abuja, the capital, Wednesday.

Emefiele has faced calls for more than a year to devalue the currency, as other oil exporters from Russia to Kazakhstan and Angola have done, amid a rout in crude prices since mid-2014 to around $50 a barrel. Investment into Nigeria has shriveled as foreigners are put off by capital controls needed to defend the currency’s peg of 197-199 per dollar, while local businesses have struggled to import raw materials and equipment. Emefiele said last month the central bank would implement a “flexible” exchange-rate policy to help alleviate a dollar shortage that has strangled the economy. Nigeria's GDP contracted in the three months through March for the first time since 2004 and inflation accelerated to 15.6% in May, the highest rate in more than six years. It is about to explode much higher.

The new exchange rate will be welcomed by businesses that were forced onto the black market to pay for their imports. On occasions they were paying almost double the official rate for dollars.

Foreign investors may also be tempted back as they will get more value for their money.

But the new exchange rate is likely to push up already high inflation as prices soar to keep up with the collapse in the spot rate. And that will hurt tens of millions of Nigerians who live in abject poverty.

The naira will probably trade in a range of 280 to 350 against the dollar after the central bank implements its decision, analysts at Johannesburg-based Rand Merchant Bank said in a note on Wednesday before the announcement.

- with AP-BBC



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