Is Nigeria’s Flexible Exchange Rate Policy Crashing?

Sitting in his cramped office in the basement of a Chinese-themed hotel in Lagos, Abubakar Mohammed complains about a shortage of dollars that’s crippling Nigeria’s economy and driving black-market naira rates to a record.

The experience of the 37-year-old, who runs one of Nigeria’s roughly 3,000 money-trading outlets known as bureaux de change, or BDCs, belies central bank Governor Godwin Emefiele’s insistence that liquidity has improved since policy makers said they would allow the naira to trade freely in the interbank market more than three months ago, resulting in a depreciation of 38 percent against the US currency.

The float is anything but free, according to investors including Aberdeen Asset Management Plc and Duet Asset Management Ltd., with the central bank holding the naira in a tight range around 315 per dollar since the beginning of August. Most local businesses and Nigerians going abroad can’t get dollars from their banks and have to turn to the BDCs, which have more leeway in setting prices, and black-market street-traders openly plying their services across the country. They sell each dollar for around 475 naira, compared with 425 in mid-September.

“Back in January, we never knew the naira would head toward a staggering 500,” Mohammed said. “This is not the real value. But because the liquidity is not there, the pressure keeps mounting and the naira keeps depreciating.”

Naira forwards have soared to records, suggesting foreign investors see another devaluation coming. Contracts maturing in six months trade at 379 per dollar, their highest-ever level, while those due in a year have climbed to 417 from 325 since the end of June. The naira weakened 2 percent to 316.56 per dollar by 8:08 a.m. in Lagos.

“The market clearly sees that the situation with the exchange rate is getting more and more unsustainable,” saidKevin Daly, a money manager at Aberdeen Asset Management, which oversees about $9 billion of emerging-market debt. “The central bank’s still micro-managing it. We’d have more appetite if it was at 370.”

According to the central bank, the BDC and black-market rates, which barely differ, aren’t a true reflection of the naira’s value and only account for about 5 percent of foreign-exchange transactions in the country.

Even though foreign investors, for compliance reasons, typically have to use the interbank market if they bring dollars into Nigeria, they still watch the black market closely. For the latest rates, they monitor websites such as abokifx.com, which collates prices from traders in Lagos each day, and everdonbdc.com.

“However small the volumes, it’s a rate that’s out there and it gives you an idea of the pressures on the naira,” Ayodele Salami, who manages about $450 million of African equities as chief investment officer at Duet Asset Management Ltd., said by phone Oct. 5. “It undermines confidence in the interbank market. You can’t have a gap like this. It should never be more than five or 10 naira.”

Duet has reduced the proportion of its African assets invested in Nigeria to 12 percent from 40 percent in the past two years. The dollar shortage has meant Nigerian custodians have only been able to repatriate about 20 percent of the money Salami has asked for since the beginning of August.

“We’re in a queue,” said. “It’s not an academic issue for us. It’s real.”

Such is the dysfunction in Nigeria’s foreign-exchange market that analysts’ views on the naira vary widely. Those at Exotix Partners LLP said in a Sept. 26 note that the currency was already undervalued at 315, while Win Thin, global head of emerging markets at Brown Brothers Harriman & Co. in New York, said two days later that the naira could fall all the way to its black market rate.

“We believe black-market parallel exchange rates are a good guideline for where a freed-up currency could initially move,” he said. “Despite the introduction in June of what was touted as a new ‘floating’ FX regime, the Nigerian naira remains tightly controlled.”

Nigeria’s scarcely alone in suffering. Commodity exporters from Angola to Uzbekistan have seen black markets in currency trading boom since mid-2014, when oil prices began their more than 50 percent plunge.

That’s little comfort to Chucks Obilor, who sells tires imported from China, Thailand and Germany in Lagos. He has to use the unofficial market since he can’t get dollars from his bank. That’s forced him to put up prices and caused his sales to drop.

“I didn’t get anything from the banks,” he said in an interview on Oct. 5 in the north of the city, adding that he usually seeks amounts of $15,000 to $30,000. “I can’t stop my business, so I have to buy dollars anywhere I can.”

Mohammed, the BDC owner, doubts the shortage will end soon. That will only increase pressure on the central bank, which is running out of firepower to defend the currency. Its foreign reserves have fallen 38 percent in the past two years to $24.4 billion, the lowest in more than a decade.

“When there is scarcity of any product, there will be a black market for it,” Mohammed said. “Our foreign-exchange receipts aren’t what they were in the past. It’s the reality we’re facing.”