Update: Naira officially sells at 280/$ after currency peg ends

Nigeria’s naira slumped 30 percent against the U.S. dollar on Monday in tentative interbank trading after central bank removed its currency peg, according to a

Reuters report.

The central bank sold $530 million for 280 naira per dollar at a special auction and later sold a further $86.5 million directly on the interbank market at 281 to 285 naira, traders said.

Five banks quoted the Nigerian naira between 260.5 and 265 against the U.S. dollar as a new interbank market opened on Monday but no trades were yet to be agreed, Thomson Reuters data showed. 

Traders held off entering the new interbank market because they were nervous about foreign exchange liquidity under the new system, two dealers said. The market opened at 9 a.m with the naira first quoted at 253 versus the dollar. 

Nigerian black market foreign exchange dealers were quoting the naira in a spread between 325-345 to the U.S. dollar on Monday, firmer than 355 on Friday as new interbank trading started.

The naira traded just twice at 255 against the dollar, and less than $1 million had changed hands by 11:00 a.m. (1000 GMT), as dealers said they were nervous about foreign exchange liquidity under the new system.

Monday’s rate was sharply weaker than the 197 peg the central bank had been maintaining for the past 16 months, then abandoned last week in a bid to alleviate chronic forex shortages.

But it was still off the 350 seen on the parallel market since a slump in oil revenues started hammering public finances and foreign currency reserves.

Naira market trading will close at 14:00 pm (1300 GMT).

Foreign investors and economists had called for months for a naira devaluation as the forex shortages choked economic growth and led to widespread capital flight.

The central bank said last week it would abandon the peg in a “managed float”. The median forecast from 10 analysts surveyed by Reuters suggests it will could trade on Monday as weak as 300 per dollar.

Africa’s biggest economy, which contracted by 0.4 percent in the first quarter, faces its worst crisis in decades after the decline in oil prices since 2014 and last year’s introduction of a currency peg.

With a likely sharp fall for the naira, Nigerian products will become relatively cheap and imports more expensive, which should stimulate the domestic economy but will likely light a fire under already rising inflation.

“The new system should reduce the shortage of FX in the economy and – in the long run – reduce strains in the balance of payments by discouraging imports and boosting export competitiveness,” Capital Economics’ John Ashbourne said.

“But the new system certainly does not mark the end of Nigeria’s economic problems.”

Nigeria, Africa’s largest crude exporter, has resisted devaluing its currency for more than a year despite other major oil producers, including Russia, Kazakhstan and Angola, allowing currencies to fall after crude prices collapsed.

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