Nigeria's Naira: Moving to a flexible exchange rate

Phyllis Papadavid

Overseas Development Institute

The Nigerian economy is in recession, after having registered two quarters of negative growth in mid-2016. Its foreign exchange reserves have declined from $37.3 billion to $25 billion between June 2014 and September 2016 alone, and its current account is now in deficit, with the IMF expecting it to be 2.8% of GDP in 2016 – its lowest level since 1998. The slump in oil prices has been a key driver as petroleum exports represent 90% of Nigeria’s total export revenue. This economic predicament is exacerbated by policy uncertainty regarding liberalisation of the naira exchange rate.

President Buhari recently stated that he anticipates an economic recovery. Yet the composition of the Nigerian economy has left Nigeria with a growing oil-related external imbalance, suggesting that prospects for growth, and employment, will remain poor. The Central Bank of Nigeria (CBN) would like to foster greater exchange rate flexibility to facilitate a new phase of growth and development. This would enable a diversified growth path away from the oil sector following Nigeria’s slow economic transformation.

Meanwhile, speculative inflows into Nigeria will continue to exert a downward pressure on the currency unless there is a strategy to fully liberalise the naira to improve Nigeria’s external position and to rebuild foreign exchange reserves. Following the flexible naira exchange rate regime announcement, policy-makers should now focus on freely floating. This is essential if the new currency regime is to gain credibility, catalyse confidence and complement any growth transition to the non-oil manufacturing sectors.

Download the briefing paper at the link below:

https://www.odi.org/publications/10559-nigerias-naira-moving-flexible-exchange-rate