The governor of Nigeria’s central bank on Tuesday said Africa’s largest economy is headed into an imminent recession, adding that he would partially loosen the local currency’s peg to the dollar, a policy he said had helped bring about the hardship .
The country of 187 million people, Africa’s biggest crude exporter, is suffering severe shocks, Godwin Emefiele said, chief among them a decline in global oil prices that has left the government without enough revenue to replenish its reserves.
To protect those reserves without devaluing the naira, which has been set at 199 to the dollar since March 2015, the central bank has rationed foreign currency, forcing businesses to join a long waiting list to buy the dollars they need to import parts and pay foreign creditors.
That has brought about a crippling scarcity of foreign currency that is helping tip Nigeria’s $538 billion economy into negative growth, he said. To ease the pain, the bank will now allow the naira to float at a more flexible rate. Some businesses will still be able to buy dollars at the official, cheaper rate, he added.
“Options are very limited,” said the governor. “To avoid complicating conditions, the committee decided on the least risky option.”
The announcement left some investors both encouraged and puzzled over the direction of Nigeria’s oil-rich economy. For months, investors have asked Mr. Emefiele to devalue the naira, which would allow the central bank to stop rationing dollars, and help businesses import the supplies they need. Tuesday’s announcement appeared to be a step in that direction.
But the governor didn’t specify how flexible the new exchange-rate policy would be or say whether he would try to keep the naira trading against the dollar within a certain range. He also didn’t explain how many businesses would be allowed to buy at the official window and for what price.
“We need to know the details before we get excited,” said Alan Cameron, an economist at advisory firm Exotix. “It’s a positive step for Nigeria, but we don’t know just how positive it is yet.”
Nigeria ranks high on the long list of oil-producing giants hurt by a global crude glut. The country, which grew at 7% annually for the past decade to 2014, once boasted one of Africa’s most stable currencies and monetary environments. Inflation and exchange-rate volatility remained low.
That has been upended, first by the collapse in crude prices since 2014, and then by the government’s attempts to avoid a devaluation, which would be painful for a country whose citizens—60% of whom earn less than $1.25 a day—import almost everything. Since taking office in 2014, Mr. Emefiele has seen his country’s revenue dwindle.
Since March 2015, he has responded by enforcing increasingly stringent restrictions and longer wait times governing which businesses can buy dollars and for what purposes. That has left the country unable to import enough spare parts to keep its factories going, or enough gasoline to fill its drivers’ tanks. Cars line up for days in the economic capital of Lagos to purchase fuel.
That policy “was an unsustainable folly,” John Ashbourne, an economist at London-based research consultancy Capital Economics, said in a note on Tuesday. “But while the Bank has admitted the failure of its current system, Governor Godwin Emefiele provided few details regarding what will replace it.”