Nigeria's Naira Touches Record Low After Official Devaluation

Woman takes Nigerian Naira from automated teller machine in Ikeja district of the country's commercial capital, Lagos, Nov. 12, 2014.

Nigeria's currency touched a record low against the dollar on Wednesday, a day after the central bank devalued it by 8 percent, complicating efforts to contain inflation before presidential elections early next year.

Falling world oil prices and a retreat from emerging markets have put pressure on the currencies of several oil exporters, including Angola, where the Kwanza also hit a record low on Wednesday, as well as that of Nigeria — Africa's top producer.

The country grows most of its own food but imports a number of staples such as wheat and rice, making currency weakness extremely sensitive for a poor population — around 60 percent of whom were living on less than a dollar a day in 2010 according to the statistics bureau.

The central bank has spent several billion dollars defending the naira this year but it devalued the local unit and raised interest rates sharply on Tuesday to try to stem its losses.

On Wednesday the bank sold $667 million at its twice weekly forex auction to meet a backlog of dollar demand, which combined with dollar sales from some multinational oil companies enabled the naira to close up 0.3 percent at 176.80.

But that was still just below the central bank's new target band of 5 percent either side of 168 to the dollar.

Trading in the next few days will test whether financial markets believe that target is realistic for a country contending with a 30 percent fall in world oil prices since June as well as an Islamist insurgency in the northeast.

Africa's top oil producer relies on crude revenues for around 95 percent of its foreign exchange earnings and imports 80 percent of what it consumes. With oil trading below $80 a barrel for the first time in four years, the drop in global oil prices — caused in part by increased production in the United States and slowing demand in Asia — has become a cause for political concern.

A surge in living costs would be a headache for President Goodluck Jonathan less than three months before what is likely to be a closely fought presidential election. The finance ministry last week announced it would rein in expenditures and place new taxes on luxury goods.

A Welcome Move

Economists welcomed Central Bank Governor Godwin Emefiele's action as accepting the reality of the naira's sliding value in trading between commercial banks.

“Given the move higher in the largely-market determined interbank rate ... the widening of the band around the official mid-rate, and the setting of the mid-rate at 168 were the right moves,” said Razia Khan at Standard Chartered bank.

Analysts also said Tuesday's widening of the band from 3 percent either side of the target rate would help to build in some flexibility. The stock market received the devaluation positively, closing up 1.37 percent.

Some expected further pressure. “If you look at the currencies of other oil exporters, they have fallen more than the naira, so they may need to allow [for] some more depreciation,” said Jack Allen, an economist at Capital Economics.

Bismarck Rewane of the Lagos-based Financial Derivatives Company echoed the sentiment.

“I think it was a move in the right direction, but I’m not too sure it was completely adequate," he said. "But it moves toward equilibrium.”

Rewane also said devalued currency means businesses and individuals who get paid in naira but pay bills in foreign currencies will end up spending more, which means that both government officials and Nigerians who work overseas will find doing business more expensive.

“The [Peoples Democratic Party] will have to work much, much harder to convince people that they are in charge of things and they can control things, and that the future is going to be better than the past, because it actually just makes people more desperate,” he said, adding that inflation may tick up in the new year, raising prices for consumers as the election grows near.

Emerging Market Pullback

Foreign oil companies, which typically buy naira towards the end of the month to fund their Nigerian operations, helped the currency to recoup some of its losses on Wednesday. Total of France sold $20 million and Anglo-Dutch Shell an undisclosed amount, boosting dollar liquidity on the interbank market, dealers said.

Dealers also said there were expectations that the central bank would intervene to keep the naira within the band.

“It's too early to tell if it's confidence returning or not. Demand for dollars has not changed,” said one dealer. “The market had priced in the devaluation for some time now.”

Falls in the naira have spooked bond investors who had been wooed by Nigeria's high yields.

The yield on Nigeria's 2022 government bond rose 45 basis points to 14.25 percent, reacting to the increase in the policy interest rate of 100 basis points to 13 percent on Tuesday.

Nigeria's central bank on Wednesday advised banks it would drain a combined 568 billion naira ($43 billion) to meet a new reserve requirement on private sector cash deposits.

The overnight lending rate, which had been in suspension while it waited for that information, almost doubled to 20 percent.

Nigerian revenues have also been hit by crude oil theft from pipelines and the disappearance of large sums from the state oil firm that were highlighted by former central bank Governor Lamido Sanusi earlier this year.

Analysts say failing to devalue would have been much worse. “The bold steps taken by the central bank will help tremendously to stem the drawdown in foreign exchange reserves,” South African-based NKC Research said in a note on Wednesday.

“Given the sharp depreciation of the interbank exchange rate in recent months ... the cost of imports would have increased even in the absence of an official devaluation.”

According to its website, Nigeria's central bank has spent an average of $27.9 million a day this year defending the naira, but it has still dropped by 11 percent so far this year.

Emefiele told an investors' conference call on Tuesday that Nigeria's foreign reserves stood at $36.5 billion, down 18.3 percent from a year ago. “We will continue to defend the currency as much as we can but not at all costs,” he said.

VOA's Chris Stein contributed reporting from Abuja.