Nigeria: Risk of Devaluing Naira Rising

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Nigeria’s central bank auctioned $230 million in forward contracts on the official market on Thursday after selling $370 million earlier in the week to boost dollar liquidity and help narrow the gap between the official and black market rates.

The poll showed that the timing for how long it would take to narrow that gap is uncertain. Analysts say it depends on how far the central bank is willing to go, although a free float would take months instead of years to squeeze the spread between the two rates.

Devaluations are painful, mostly to the poor, as the cost of living increases. But analysts say they are necessary to fix the broader economy.

Egypt floated its currency in November, and it subsequently halved in value against the dollar. But it is now more than 20 percent above its low at 15.7 per greenback.

Financial Derivatives Company, a research think-tank in Nigeria, wrote that the only reasonable way to reduce the disparity between the interbank and black market is by restoring market confidence through the consistent implementation of transparent and market-driven policies.

“A float of the naira is not necessarily a magic wand which will resolve the current economic malaise. Instead, it will simply provide a premise for the introduction of policies, which will encourage inward investment and support economic growth.”