Nigeria naira remains under strain after devaluation

The central bank bucks global trends by holding interest rates to support the currency
Chief Investment Office26 Mar 2020
Photo credit: AFP Photo

Nigeria will probably need to weaken the naira further following its devaluation last week (ended 20 March), even as the central bank bucked global trends by holding interest rates on Tuesday (24 March) to support the currency.

With the decision to keep its benchmark rate at 13.5%, the central bank aims to avoid putting further pressure on the local unit after devaluing the exchange rate used by foreign bond and stock investors, which had been largely pegged since 2017, by about 4% to 380 per dollar on Friday.

Other major oil currencies have fallen much more this month following the plunge in Brent crude prices to less than USD30.00 a barrel. Russia’s ruble is down by 15% and Colombia’s peso by 14%. The derivative and black markets suggest the naira is still under plenty of strain. The price of three-month non-deliverable forward contracts has surged to 421 naira per dollar, signalling traders see another 10% devaluation in that period.

Nigeria could tighten capital controls to support the naira, though it will be forced into another devaluation by the third quarter, according to an Africa analyst. A weaker naira would boost government revenues by allowing dollar earnings from oil to be converted at a higher rate. In contrast, it would increase the Nigeria’s foreign debts in local currency terms. – Bloomberg News.

The US Dollar Index (DXY) lost 0.97% to 101.050, the euro climbed 0.87% to USD1.0882, the pound gained 0.99% to USD1.1878, and the yen strengthened 0.31% to 111.21 per dollar.

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