August currency review: Nigeria's sly devaluation

The central bank of Nigeria has tried hard to avoid devaluing the naira in the last few years, fearful of how unpopular such moves can be, given that they usually create higher inflation (already at 16%). However, on 2 August, it pulled off the neat trick of effectively devaluing the naira, without seeming to have done the deed itself.

Having spent the last several months making its currency regime increasingly complex, by introducing multiple exchange rates, the bank's latest reform has greatly simplified it again, although two exchange rates still remain.

Further details of the changes can be found here, but effectively the authorities have allowed banks to start quoting foreign exchange at one of the special rates it created recently (the NAFEX rate, which was previously only for investors), instead of using the official rate. The dominant interbank rate of the naira was immediately set by the banks at almost the same level (USD 1 / NGN 365 as opposed to NGN 367), amounting to a significant devaluation to well below the value of the official rate (still fixed at USD 1 / NGN 305). It appears that the official rate will now only be used by importers of fuel, and all other rates have been scrapped.

International assignees working in Nigeria will be able to convert currency at the new devalued interbank rate, getting more nairas for their foreign money. This will at least partly offset the high cost-of-living pressures produced by soon-to-be-accelerating price rises following the devaluation.

However, the naira was only the world's second-weakest currency this month (see first table). The one that lost the most was the Liberian dollar, whose value is controlled by the central bank. The devaluation occurred over three days between 27 and 29 August, but no reasons were publicly reported.

The euro goes from strength to strength, continuing a long recent trend. Only two currencies gained more than 1% against it in August, as the next table shows.

Finally, here is this month's selected currency movements table: