Nigeria is expected to devalue its local currency, the naira, by approximately 15% following the inauguration of President-elect Bola Tinubu on May 29. This decision comes as Africa’s largest economy seeks to restore stability and boost its foreign exchange reserves.
Nigeria currently operates under a multiple exchange rate system, with a tightly controlled official rate that limits access for businesses and individuals. This has resulted in a surge in demand for foreign currency on the unregulated black market. To tackle this issue, Tinubu has pledged to review and optimize the naira system, which he has described as “somewhat arbitrary” in his election manifesto.
The Central Bank of Nigeria has maintained the naira at a rate of approximately 460 per dollar since the beginning of the year as a measure to contain inflationary pressures. However, this has led to a widening gap between the official and parallel markets, reaching nearly 60%. Recognizing the need for greater flexibility in the exchange rate regime, experts anticipate an upward adjustment of the naira to around 530 per USD after Tinubu’s inauguration.
Financial analysts have been pricing naira forward contracts with an expected depreciation of around 21% over the next three months. Furthermore, a survey conducted by Bloomberg last year revealed that investors and analysts also predicted a naira devaluation following the election of a new president.
A currency devaluation is expected to help alleviate the severe imbalances currently affecting Nigeria’s foreign exchange and trade markets. It will provide some relief for businesses grappling with limited access to foreign currency, ultimately promoting economic growth and stability.
Several factors support the need for this devaluation. First, there are expectations that inflation may peak in the coming months, which would ease pressure on the central bank to artificially maintain a low exchange rate for the sake of price stability. Second, Nigeria’s international reserves have dwindled to an almost two-year low of $35 billion, which could face further pressure from growing debt servicing costs and weaker oil prices. Historically, when the reserves approach the $30 billion mark, the central bank tends to revise the exchange rate upward, as observed in previous instances such as August 2017, March 2020, and February 2021.
As Nigeria prepares for the inauguration of President-elect Tinubu, the anticipated 15% devaluation of the naira is seen as a significant step toward addressing the nation’s economic challenges. The adjustment aims to restore balance to the foreign exchange market, boost trade, and create a more conducive environment for businesses to thrive. While the devaluation may introduce short-term uncertainties, it is expected to pave the way for long-term economic growth and stability.
