Unlock the Editor’s Digest for free
Roula Khalaf, Editor of the FT, selects her favourite stories in this weekly newsletter.
The Nigerian naira has reversed recent losses to become the world’s best-performing currency in recent weeks, lifted by two huge interest rate rises.
The currency, which hit a record low against the dollar of N1,625 on March 11 on the official market, has since rebounded by more than 26 per cent. It was trading at about N1,284 to the dollar on Wednesday.
The two rate rises by the central bank, which is led by former Citigroup executive Olayemi Cardoso, in February and March have been credited for kick-starting the naira’s recovery.
At its most recent meeting last month the bank lifted rates by 2 percentage points, following a jumbo increase of 4 percentage points in February, its first rate-setting meeting since Cardoso’s tenure began in September.
“The authorities in Nigeria have successfully got the mechanics of a functioning [currency] market in place,” said Razia Khan, head of research for Africa and the Middle East at Standard Chartered.
While the country had been missing significant dollar inflows, “we think part of what is driving the price action on the Nigerian foreign exchange market is the expectation that there could be more favourable flows to come, perhaps Nigeria would do a eurobond or there would be World Bank financing”, Khan said.
The recent gains mark a remarkable turnaround for a currency that dropped as low as N1,900 to the dollar on the black market in February. Two devaluations in eight months and a long-running liquidity crunch pushed down the currency by more than 70 per cent to new lows, leading authorities and analysts to wonder if the currency would breach the N2,000 mark.
Nigeria’s central bank has cleared more than $7bn in foreign exchange obligations inherited from the previous administration that had been a source of much consternation for business. These were sums owed in forward contracts to companies that sold naira to the bank in exchange for dollars.
“The high interest rates have encouraged hot portfolio inflows which helped to support the currency and gave the central bank some firepower to intervene in the market,” said Bismarck Rewane, an economist and chief executive of Lagos-based consultancy Financial Derivatives.
With inflation at an almost three-decade high of 33.2 per cent, analysts predict that the bank will again raise rates at its next meeting in May to address persistently high prices. Higher interest rates could drive more dollar inflows into the economy, helping to lower inflation. Rewane predicts a 1 per cent rise in rates, while StanChart’s Khan sees a potential hold at the current 24.75 per cent.
Analysts say investors have been encouraged by the central bank’s market-friendly moves and that private sector investors are returning. Cardoso said last week that central bank reserves had an inflow of $600mn in just two days.
But Khan said investors returning to Nigeria are those already familiar with the market, and there has not been a rush like that seen in Egypt after it secured a $55bn bailout and Gulf investment package last month.
“There is portfolio interest and it is coming from a traditional offshore base and those with experience in frontier Africa,” she said. “There isn’t evidence of a widening out in an especially big way yet.”
Rewane, whose firm provides advisory services to investors, said investors had been heartened by the central bank’s moves but added: “People are looking for clarity and consistency. The picture is getting clearer, but people are not sure that there is a consistent comprehensive plan yet.”
Under Cardoso, the central bank has repeatedly insisted that it wants a “willing buyer, willing seller” foreign exchange market where prices are determined by market forces. Last week he said at the IMF and World Bank spring meetings that he envisages a future in which the central bank no longer intervenes in the market except in “very unusual circumstances”.
Nevertheless, the central bank has resumed selling dollars to the country’s more than 1,500 licensed foreign exchange dealers — a move that has improved liquidity — but has instructed them not to sell beyond a 1.5 per cent spread to end customers. Pieter Scribante, a senior political economist at Oxford Economics Africa, described this scenario as a “dirty float”.
The naira’s rally has also coincided with a 6.5 per cent depletion of the central bank’s liquid reserves since March, according to the most available data from the bank, leading to suggestions that the bank has been supporting the naira more than previously disclosed.
Cardoso has dismissed such suggestions. “It is not our intention to defend the naira,” he said in Washington.
“The shifts you’ve seen in our reserves have really little or nothing to do with defending any naira and that’s certainly not our objective.”