Global markets received a pleasant surprise during trading on Wednesday following the Central Bank of Nigeria’s (CBN) unanticipated decision to de-peg the Naira against the Dollar in an effort to revive economic growth, according to Lukman Otunuga, research analyst at FXTM.
Otunuga said that for an extended period, the incessant declines in oil prices have slashed the nation’s foreign exchange earnings, while the Dollar peg heavily eroded reserves which simply pressured the nation further.
“With fears mounting that a recession could be pending in Q2 amid depressed oil prices, the central bank’s move to de-peg the Naira may have mitigated some concerns, consequently boosting sentiment.
“Although the Naira may be set to depreciate to unfathomable levels as the natural forces of supply and demand determine its true value on the free floating exchange, this could encourage domestic import substitution, while re-attracting foreign investors. As of now, the CBN will need to act with haste by hiking rates, as ongoing Naira weakness may punish Nigerians further while causing inflation to spiral uncontrollably.
“As the nation finds normality in the future and slowly diversifies away from being oil-reliant, economic growth should improve and this should naturally boost the value of the Naira that is now on a free floating exchange,” Otunuga said.
The Central Bank of Nigeria, CBN, had on Wednesday formally unveiled the flexible foreign exchange policy, saying it would launch a forex interbank trading window that will be purely market-driven.
The new policy effectively removes controls on the naira, and is expected to increase dollar supply and help the nation’s weak economy.
Making the announcement in Abuja, Godwin Emefiele, CBN governor, said the bank will operate a single trading window, to be launched on Monday.
The new window will have about 10 primary traders, to be appointed by the bank. Each trader will have a minimum volume of $10 million, he said.
He said the new mechanism would enable businesses plan their portfolio effectively without fear of losses as a result fluctuation in exchange rates.
“We are optimistic that the steps we have taken today will further deepen the market and help get foreign exchange into the market. I will say to Nigerians be calm, there is no need to worry, everything is well,” Mr. Emefiele said.