Nigeria will allow the embattled naira to trade freely in a move to
control the currency crisis in the country, this new system will come into
effect on 20 June and is expected to lead to a significant devaluation of the
naira.
The fixed currency rate had created a vast black market for US dollars
and squeezed the country's economy. Nigeria's central bank had long been
expected to allow the naira to be more flexible and trade at a market-driven
rate.
The naira is fixed at 197 to the US dollar, but the black market rate has
soared to 370 in recent months. This currency fix was introduced in February
2015 to stop the naira from falling when lower oil prices sparked trouble for
Nigeria's economy.
But a prolonged period of holding a currency at an artificial level often
has a disruptive effect as foreign companies become reluctant to import goods
when they are paid at distorted levels. For months, Nigeria has been in the
grips of a severe foreign currency shortage. As oil prices plummeted, so did
the country's foreign currency earnings, meaning there was less cash to pay for
imports. Unlike other major petroleum producers, such as Russia,
Nigeria refused to devalue its currency. The country's president wanted
Nigerian businesses to make what they could not import and to diversify the
economy away from the oil industry, But that policy led to widespread shortages
of raw materials, machine parts and supermarket products.
The new exchange rate will be welcomed by businesses that were forced
onto the black market to pay for their imports. On occasions they were paying
almost double the official rate for dollars.
Foreign investors may also be tempted back as they will get more value
for their money. The new exchange rate is likely to push up already high
inflation. And that will hurt tens of millions of Nigerians who live in abject
poverty
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