Actually, Nigeria's currency isn't as 'free' as we thought it would be

Nigeria finally did the painful thing everyone said it had to do: On June 20, it unpegged the naira from the US dollar and promised to pursue a flexible exchange rate system.

The currency fell by about 30% down to 280 naira per dollar that day, compared to the pegged rate of 197-198 per dollar.

However, one month later, it looks like Nigeria’s currency isn’t actually as free as was promised last month.

And the best way to see this is to look at a chart.

In a note to clients, John Ashbourne, Africa economist at Capital Economics, shared the following chart comparing Nigeria’s currency today to what happened with the Argentine peso when that country allowed its currency to float in December 2015.

There are two big takeaways here: First, the Argentine peso continued to weaken after the devaluation, while the naira has stayed more or less stable, which suggests “the currency is not as ‘free’ as was promised,” Ashbourne writes. (Notably, economist Nonso Obikili recently argued a similar point in a great post.)

Second, we turn our attention to the parallel exchange rates — that is, the unofficial rates which prevail in informal markets — which are represented by the dashed lines. In the chart, we can see that the Argentine peso’s devaluation pulled the parallel rate closer to the official rate, while the Nigerian naira still looks overvalued.

“The new official rate, in other words, has not adjusted by enough to bring the foreign exchange market into balance,” explained Ashbourne.

“…as we have long argued, we think the currency needs to drop further, probably beyond 300/$, to narrow the current account deficit and reduce strains in the balance of payments.”

“To be clear, it’s not unreasonable for an oil exporter to heavily manage (or peg) its currency. Since the main source of revenues is priced in dollars, a stable currency will make fiscal policy more predictable and avoid potentially destabilizing fluctuations in the exchange rate (in line with the country’s terms of trade),” Ashbourne added.

“The key point, however, is that the [Central Bank of Nigeria] has overpromised and undelivered. The mismatch between the pledge to move to a ‘free float’ and interventionist actions will further sap trust in the CBN,” he argued.

The naira is weaker by 0.5% at 295.500 per dollar as of 12:41 p.m. ET.

NOW WATCH: A nutrition expert reveals how often you should eat to look better

Business Insider Emails & Alerts

Site highlights each day to your inbox.

Follow Business Insider Australia on Facebook, Twitter, LinkedIn, and Instagram.