Nigeria effectively devalued the naira for private individuals on Monday, paving the way for a possible broader move despite stiff resistance from President Muhammadu Buhari.

With Buhari abroad for medical treatment and the country’s currency exchange system in chaos, the central bank said Nigerians wanting dollars for travel or to pay foreign school fees could buy dollars at nearly 20 percent above the official rate.

Some Nigerians saw the announcement as a step towards implementing a more flexible currency regime and narrowing a yawning gap between the official and black market rates. However, that did not necessarily mean the authorities were yet ready to allow a free-float for the naira currency as Nigeria struggles with its first recession in a generation.

Monday’s announcement covers about 20 percent of total foreign exchange demand and allows those wealthy families who send their children to schools and universities abroad to buy foreign currency at a rate of around 366 naira to the dollar.

This is less favourable than the official rate of 305 which commercial importers typically use, but vastly more advantageous than on the black market where most individual Nigerians have to buy dollars due to hard currency shortages in the banking system.

Dealers said the naira hit a record low of 520 on the black market after the central bank’s announcement.

Nigeria has tried to make the exchange rate more flexible before, leading to a 30 percent devaluation last year, only to reimpose a quasi currency peg.

Analysts say the central bank, which has been under pressure from Buhari to maintain a strong exchange rate even at the cost of economic growth and investment, was testing the waters for a possible broader devaluation in the near future.

Buhari, a 74-year-old military ruler, has been in London for the last month, leaving Vice President Yemi Osinbajo – a business-friendly lawyer who does not share his boss’s enthusiasm for a strong naira – in charge.

“I think this is the beginning of a process to a more flexible forex system,” said Bismarck Rewane, a leading economist and CEO of Lagos consultancy Financial Derivatives. “There is panic. The system has collapsed. Dollars have disappeared at exchange bureaus at airports,” he said.

Opponents of a more flexible naira say a heavy devaluation would push up the price of imported goods on which Nigerians depend, and endanger fuel subsidies.

With Nigeria hit by low prices of its oil exports, the government wants to finalise a reform plan this month. This is needed to get a loan from the World Bank that would help to fund a record budget aimed at stimulating its economy.

Such a loan would come at a price. “The World Bank is going to insist on a more flexible forex policy,” said Charles Robertson, global chief economist at Renaissance Capital.

The African Development Bank is also applying pressure and has criticised hard currency curbs imposed by the central bank. The lender has held back a second tranche of a loan worth $400 million to demand a reform plan.

Robertson said a devaluation would make sense after Nigeria’s sale of $1 billion in Eurobonds – this would boost naira revenues and lower the need to issue domestic bonds to fund the budget.

The central bank could not be reached for comment.

POLITICS

Western diplomats says Osinbajo and technocrats have been quietly pushing for a currency float but hit resistance from Buhari and aides with similar military backgrounds.

The vice president used another Buhari absence last year to unveil the idea of a more flexible rate which led to the 30 percent devaluation weeks later.

Buhari had agreed to the move but questioned its logic just a week later, after which the central bank gave up the original idea of a free float by introducing a new quasi-peg.

In a sign that things might be moving again, Osinbajo, a lawyer from the commercial capital Lagos, chaired last week a meeting of the National Economic Council, the top state advisory body, demanding an urgent forex review.

Central bank governor Godwin Emefiele, who has toed Buhari’s line, was present at the meeting, saying that patience was needed and everything was under “under control”, an attending deputy governor has said.

Some investors warned against reading too much yet into the central bank announcement. Kevin Daly, Portfolio Manager Emerging Market Debt at Aberdeen Asset Management, noted Nigeria now has several exchange rates.

“But I don’t think it signals an imminent change to a free float. I think that is something that they are – certainly under the existing leadership – going to want to avoid,” he said.

The central bank has boosted its foreign reserves in the past few weeks to a 19-month high of $29 billion, hoping it will attract investment. This also prepares the bank to defend a new exchange rate.

But oil revenues are below plan due to the closure of an export pipeline after a militant attack, reducing the flow of dollars to manufacturers via the banking system. Importing firms have been therefore forced to buy more from the black market, which has worsened the naira’s battering.

A Lagos-based senior banker said the new rate for school fees was a test balloon to see where the market could be heading. “I think they want to start with some of the smaller elements of demand, devalue that part of the market and then see what happens in the market,” he said, asking not to be named.

TABOO

With Buhari practically banning use of the word “devaluation” the central bank could launch more rates for certain imports or travel allowances.

This would add more flexibility but also confusion. The West African nation already has at least five exchange rates including the official one, a rate for Muslim pilgrims going to Saudi Arabia, the one for school fees and a retail rate set by licensed exchange bureaus at 399.

Finally the is the rate offered by the black market changers operating under trees or in parking lots with nervous customers hurrying to count their money before any police raids.

The biggest concern for the government is that a devaluation would hit the poor suffering already from recession. The subsidised fuel sale price of 145 naira a litre would also be difficult to keep.

“At this stage, it is all speculation,” said Shahzad Hasan, portfolio manager emerging markets fixed income at Allianz Global Investors. “It is possible that they could be moving to some sort of managed float, or they could do some FX policy adjustment or some kind of a peg.”

(Additional reporting by Camillus Eboh, Karin Strohecker and Sujata Rao; Writing by Ulf Laessing; Editing by Ed Cropley by David Stamp)