The Naira bears received ample encouragement during trading on Monday with prices depreciating more than 40% against the Dollar at 280 following the central bank of Nigeria’s historic decision to remove the 199 peg. Although the Naira could be poised to decline further as the natural forces of supply and demand set an equilibrium price level, this may be beneficial for the nation that has been engrossed in an ongoing battle with faltering oil prices. It should be kept in mind that the Naira de-peg could be the first step in attracting foreign investors, boosting domestic import substitution, while potentially abolishing the parallel black market exchange rate.
Although there are still concerns over slowing domestic growth, the central bank’s action has boosted overall sentiment, which has consequently sent the Nigerian stock markets surging over 8% in local currency terms. With domestic petrol prices remaining stable and foreign airlines potentially resuming their flights amid a free floating Naira, there is optimism that economic growth may resume in the long term, despite fears of a technical recession in Q2. The Central Bank of Nigeria may need to act fast, as there are still lingering concerns that a weakening Naira could punish the citizens further, while causing inflation to spiral out of control.
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Written by Lukman Otunuga, Research Analyst at FXTM
