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Merging Exchange Rates May Accelerate Inflation

Merging Exchange Rates May Accelerate Inflation Merging Exchange Rates May Accelerate Inflation

Nigeria will probably maintain its system of multiple exchange rates, which the International Monetary Fund has long-urged it to scrap, until at least early 2020, according to Moody’s Investors Service.

Merging the naira’s various rates any sooner might force the government to weaken the currency and raise fuel prices, which would accelerate inflation, the ratings company said, Bloomberg reported.

Nigerian monetary and fiscal authorities are likely to wait until investments in oil refineries and fertilizer plants, including by billionaire Aliko Dangote, reduce Nigeria’s imports of petroleum products. While that may take another two years, it would put the government in a better position to stabilize fuel prices, which it caps at a level based on the central bank’s official naira rate, Moody’s said.

If the government merges the exchange rates, “they won’t be able to provide discounted dollars to oil marketers.” Aurelien Mali, a sovereign analyst with Moody’s, said in an interview in Lagos on Wednesday. “It means that either they have to increase pump prices or give subsidies to marketers, which would impact public finances. Neither option is credible at the moment.”

Despite being an OPEC member and Africa’s biggest oil producer, Nigeria imports nearly all its fuel because of the decrepit state of its refineries. It caps the gasoline price at 145 naira per liter ($0.48 at the official rate), which analysts say is below market costs.

Central bank Governor Godwin Emefiele introduced the current system in response to a severe shortage of foreign exchange after the 2014 crash in oil prices. While the official exchange rate hasn’t changed from 305 per dollar since a devaluation in mid-2016, a new one for importers, exporters and investors was introduced in April last year, in which the naira was allowed to weaken. Known as the Nafex rate, it’s been steady at around 360 against the greenback, almost 20% weaker than the official rate.

There’s also the Nifex rate, which the central bank uses as a guide to sell dollars to banks during weekly auctions, and other windows that companies can access depending on the sector they’re in.

The IMF has said the existence of multiple exchange rates creates distortions in the economy and discourages foreign investment.

Inflation has slowed to 13.3% from a high of almost 20% in early 2017, thanks to an improving economy and tight monetary policy. Nigeria’s President Muhammadu Buhari has been keen to bring it down further before elections scheduled for February, when he plans to run for a second term.

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