The Nigerian naira fell off a cliff on Monday morning after the Central Bank of Nigeria removed the currency’s peg to the dollar.
The move was an attempt to devalue it in response to tumbling oil prices.
As trading opened for the day, the naira dropped more than 27% against the greenback, hitting 257 naira per dollar.
The removal of the naira’s peg against the dollar was announced on Wednesday last week, after long-term speculation about whether or not it may happen.
The CBON said that it would move to a “purely market-driven” currency system to help Africa’s biggest economy cope with the effects of the global oil price slump in the past couple of years. Prior to the peg being taken away, the naira broadly traded at around 197 per $1.
Here is how the naira’s enormous drop looked:
In the short-term, the move was expected to be painful, but a 27% fall is probably a bigger move downwards than had been expected. Long-term however, the naira floating freely will likely be a net positive to the country’s economy.
“Over the long-run, a weaker currency will help Nigeria’s economy by encouraging import substitution and attracting foreign investors, who have shunned the country for fear of a devaluation,” wrote Capital Economics’ Africa economist John Ashbourne in a note sent to clients last week.
“This will release a pressure valve for the economy. We see the economy beginning to thaw and green shoots emerge possibly as soon as a year from now. Before then, we believe the macro picture will deteriorate,” Yvonne Mhango, an analyst at Renaissance Capital told Bloomberg.>
Analysts had long been arguing that Nigeria would eventually have to capitulate and devalue its currency given that the government’s controversialagenda of currency and price controls created a bunch of economic stresses in Africa’s largest economy. Most recently, inflation soared to a six-year high. As a result, last Wednesday’s announcement was widely expected.
Devaluing the naira is a step towards helping to fix Nigeria’s stalling economy, but as my colleague Elena Holodny pointed out last week, it won’t solve all its problems. The country saw its economy shrink by 0.4% in the first quarter of 2016, and continues to suffer turmoil when it comes to fuel shortages, along with disruption to the oil industry because of a rebel group known as the Niger Delta Avengers. The country faces a “full-blown economic crisis” Capital Economics’ Ashbourne said in May.
Despite these issues, rating agency Moody’s sees the move as a net positive for Nigeria, saying in a report: “A functioning flexible exchange rate will reduce dollar liquidity shortages and associated risks of banks failing to meet their dollar liabilities when due or requiring the Central Bank of Nigeria to impose capital controls. It also will allow banks to expand their trade business, supporting their fee income and profitability.”