The devaluation of the naira will boost oil-related earnings in naira term and enhance Nigeria’s ability to borrow from the international capital market.
According to Razia Khan, Standard Chartered’s Chief Economist for Africa, the devaluation of the naira to N410 to the dollar will “provide a boost to oil-related earnings in local currency terms, but Nigeria’s efforts to borrow externally will also be more favourably received as a result.
Khan, in an email response to questions on Tuesday’s Monetary policy committee (MPC) decision to retain its benchmark rate at 11.5 percent, said “most important point to emerge from the CBN’s press conference was confirmation that the I&E rate was being used for official transactions.
“These statements confirm the effective harmonisation of the I&E and official FX rates, a key requirement for the unlocking of further donor financing (such as World Bank budget support),” Khan said.
On the decision of the CBN to retain its benchmark rate at 11.5 percent and left all other parameters unchanged, the chief economist said “it is not immediately clear if there are plans for even deeper FX market liberalisation.
“Given concerns about still-elevated inflation, with insecurity driving food price inflation, perhaps not.
The CBN held its benchmark interest rate at 11.5 percent on Tuesday as it tries to support the country’s fragile growth and combat rising inflation.
The regulatory bank monetarists also retained the Cash Reserve Ratio at 27.5 percent, Liquidity Ratio at 30 percent and maintains Asymmetric Window of +100 and -700 basis points around the MPR.
The bank adjusted its official exchange rate to N410.24 to the dollar on Monday, effectively devalued the local currency from N379 per dollar adopted last June.
The International Monetary Fund, and the World Bank had canvassed the merger of the multiple exchange rates in the country to more flexible one as part of condition for Nigeria to access a $1.5 billion loan to support budget funding.
The NAFEX, which acts as a spot rate, was introduced in 2017 to improve dollar liquidity and encourage inflows from foreign investors that were exiting the country following the 2016 economic crisis.
Nigeria suffered even more acute hard-currency scarcity last year after the Covid-19 pandemic led to a plunge in oil prices, forcing it to devalue the local unit twice.
While crude contributes less than 10 percent to the country’s Gross Domestic Product (GDP), it accounts for nearly all foreign-exchange earnings and half of government revenue.