Nigeria’s naira soared by more than 27 percent against the US dollar on Monday, following the Central Bank of Nigeria’s (CBN) decision to unify the exchange rates and remove the rate cap.

The naira closed at 864.29 per dollar on the official Investors and Exporter window, up from 1099.05 per dollar on Friday, according to data from the FMDQ Securities Exchange.

The move by the CBN, which aims to ease the pressure on the foreign exchange market and attract more investors, has boosted the confidence of traders and analysts.

Why The Naira Is Rising

The naira’s rise comes after months of volatility and depreciation, as the country faced a shortage of foreign currency due to the impact of the coronavirus pandemic, low oil prices, and security challenges.

According to a report by Punch, the CBN had maintained multiple exchange rates for different segments of the market, such as the official rate, the parallel market rate, and the I&E window rate.

However, the gap between these rates widened over time, creating distortions and inefficiencies in the market.

To address this, the CBN announced last week that it would unify the exchange rates and remove the rate cap, which had limited the amount of naira that banks could sell to customers.

The CBN also said it would release new foreign exchange guidelines and legislation to ensure the proper functioning of the domestic and foreign currency markets.

The governor of the CBN, Olayemi Cardoso, said the bank would consult with banks and foreign exchange market operators before implementing any new requirements.

What This Means for Nigeria

The naira’s appreciation is a positive sign for Nigeria, Africa’s largest economy and biggest oil producer, as it seeks to recover from its worst recession in four decades.

A stronger naira could help ease inflation, which hit a four-year high of 18.17 percent in March, and reduce the cost of imports, which account for a large share of the country’s consumption.

A unified exchange rate could also improve transparency and efficiency in the foreign exchange market, and attract more foreign investors, who have been unnerved by the naira’s instability and the backlog of foreign exchange orders.

However, some challenges remain for the naira, as the country’s foreign exchange reserves have fallen by about $1.6bn to $32.97bn since the CBN’s move.

The Economist Intelligence Unit, a research firm, said Nigeria did not have enough in its foreign exchange arsenal to defend its exchange rate unification policy.

It said high inflation and a continued spread with the parallel market, where the naira traded at around 1,500 per dollar on Monday, would leave the exchange rate regime unstable and result in periodic devaluations.

The naira’s performance in the coming months will depend largely on the CBN’s ability to supply the market with enough foreign currency and clear the backlog of orders.

It will also depend on the recovery of the global oil market, which provides about 90 percent of Nigeria’s foreign exchange earnings, and the implementation of structural reforms to diversify the economy and boost productivity.

The CBN has expressed optimism that the naira will stabilize and strengthen as the economy recovers and the new foreign exchange guidelines take effect.

It has also assured the public that it will continue to monitor the market and intervene when necessary to maintain stability and liquidity.