ABUJA May 24 (Reuters) – Nigeria’s central bank abandoned its naira peg to the dollar on Tuesday in favour of a flexible currency regime, a policy U-turn designed to boost local manufacturing and exports and stave off a recession.
However, Governor Godwin Emefiele sparked confusion in Africa’s biggest economy by declining to say how the shift from a naira fixed at 197 to the dollar would be implemented.
Details would be published in a few days, he said after a Monetary Policy Committee (MPC) meeting in the capital, Abuja.
“The MPC voted unanimously to adopt a flexible exchange rate policy to restore the automatic adjustment properties of the exchange rate,” he told a news conference.
He added that the central bank would “retain a small window for funding critical transactions”. Again, he sowed confusion by saying details would only be released “at the appropriate time”.
Analysts questioned the wisdom of announcing a major shift in policy without spelling out how to implement it.
“Any real liberalisation would be accompanied by some tightening, as a stabilisation measure, at least in the short term,” said Razia Khan, chief Africa economist at Standard Chartered in London.
“That does not appear to have been considered. This is at best curious, at worst very worrying.”
The bank’s de facto peg of 197 naira per dollar had become increasingly unsustainable due to a shortage of hard currency stemming from the slump in oil revenues.
Africa’s top crude producer relies on oil for nearly three-quarters of its government revenue and more than 90 percent of foreign exchange.
On the black market, the naira is trading 40 percent below the official rate as manufacturers and imports pay massive premiums to avoid hefty official currency curbs now blamed for tipping the economy towards recession.
The dollar-hungry industry and manufacturing sectors shrank 5.5 percent and 7 percent respectively in the first quarter, helping pushing the economy into a 0.4 percent contraction, its worst performance in years.
Tens of thousands of contractors have been laid off as businesses have either closed down or shelved their investment plans.
President Muhammadu Buhari, a 73-year-old former military ruler elected last year, has resisted calls for devaluation throughout his first year in office.
But Vice President Yemi Osinbajo hinted at change this month, saying a more flexible approach was needed to spur growth. Buhari’s spokesman declined to comment on the central bank’s change in stance.
Osinbajo’s comments, on the same day fuel prices were lifted by up to 67 percent to remove costly fuel subsidies, intensified speculation about an imminent change of heart.
On Monday, the oil minister stoked that further, saying it would use a lower rate of 285 naira per dollar for petrol imports rather than the pegged official rate of 197.
Emefiele admitted the economy was also likely to contract in the second quarter, falling into official recession, but blamed delays in implementing this budget for much of the decline.
He also kept its benchmark interest rate on hold at 12 percent and maintained the central bank’s existing cash reserve ratios for commercial banks at 22.5 percent.
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