Nigerian Central Bank governor Chukwuma Soludo announced on Tuesday that among a range of policy changes, Nigeria will redenominate its currency by August 1, 2008, removing two zeroes with 100 old nairas equal to one new naira.
The central bank will also gradually withdraw all restrictions on current account transfers, making the naira more easily convertible. Third, part of the country’s dollar revenues will be distributed to the federal and local governments. The naira rallied strongly against the US dollar on the announcement, closing at N126.45 to the dollar yesterday (Thursday) compared with N127 to the dollar a week ago.
Analysts praised the policy reforms, saying they will boost demand for Nigerian assets and make it easier to invest in local markets. "These reforms are further evidence of the improving quality of monetary sophistication in Nigeria," said Stuart Culverhouse, chief economist at brokerage firm Exotix. "The move to naira convertibility will deepen local capital markets," he told Emerging Markets.
The African Development Bank in January issued a N12.78bn ($101m) one year bond that it then swapped out of the local currency into US dollars. This was the first interest rate and currency swap in Nigerian naira. As a result of the changes announced this week, assembling such swap transactions will be easier as the forex market will gradually become more liquid.
Culverhouse argued that the move to an inflation-targeting regime would help to anchor inflationary expectations, to ensure the sustainability of the naira re-denomination and to provide investors with confidence that local currency denominated securities would provide good value. Naira redenomination and plans to allow greater market determination of the exchange rate will lead to greater currency appreciation, according to Ade Adebajo, director of debt capital markets, Africa, at Standard Chartered in London. "This should attract cross-border investors," he told Emerging Markets.
Nigeria has been flirting with the idea of issuing a Eurobond since last year, but plans were derailed when the government realised it could pay off its London Club debt with its quickly growing international reserves. Government expenditure is in naira and, from September, the federal government will disperse a portion of local governments’ funds in dollars in a bid to create a more liquid foreign exchange market.
But Alex von Sponeck, head of CEEMEA debt capital markets at Merrill Lynch argued that these monetary changes would not bring about a flurry in naira-denominated issuances.
“This is just part of the country’s monetary development, so these changes are not going to persuade people who have not yet invested in Nigeria. And let’s not kid ourselves that naira-denominated issuances by local corporates will become the norm: the dollar will always be favoured because of its stability,” he told Emerging Markets.