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Bonds strengthen and sharp devaluation looms after Tinubu suspends central bank governor

A chain of policy and personnel changes are reshaping the country's economy and surprising investors

Money market traders and other investors have been reassessing Nigerian assets following President Bola Tinubu's suspension of central bank governor Godwin Emefiele after the end of the trading on 9 June. Early the following morning, Emefiele was arrested in Lagos, then flown to Abuja where he is being detained on charges of fraud.

The value of Nigeria's debt rose by three cents in the dollar in trading on 12 June as policy advisors in Abuja said the country's multiple exchange rates would be unified in a matter of weeks. 

Investment banks such as JP Morgan, reports Bloomberg News, reckon a new unified rate for the naira would fall to N700-750 to the dollar from the current level of N471.92 to the dollar. That would cut the cost of doing business where companies have been buying their foreign exchange on the parallel market at a premium of over 60%.

In his 29 May inaugural address, Tinubu pledged to end the multiple exchange rate system and direct 'funds away from arbitrage into investment into plants, equipment and jobs that power the real economy.'

The opaque system of multiple foreign exchange rates had become a hallmark of Emefiele's governorship but were strongly endorsed by outgoing President Muhammadu Buhari (AC Vol 64 No 12, When – not if – Emefiele leaves the bank). Emefiele and Buhari calculated that the inflationary consequences of a sharp devaluation and ending fuel subsidies would be politically explosive. And Tinubu has not explained how he intends to soften this pain.

Tinubu also criticised the central banks' main 18.5% interest rate as too high, adding that 'monetary policy needs thorough house-cleaning'. 

Multiple exchange rates had been used to manage demand and avoid a sharp devalution. But they encouraged space for politically-sponsored access to cheap foreign exchange, as well as deterring investors struggling to repatriate funds from Nigeria.

Emefiele's deputy, Folashodun Shonubi, an engineer with a strong background in fintech will serve as acting governor. Tinubu is expected to name a new substantive governor soon.

It was Emefiele's decision to issue new naira banknotes and recall around 2.7 trillion naira (US$5.85 billion) from circulation in late 2022 that scuppered his chances of surviving in the new government (AC Vol 64 No 4, The naira republic's banknote crisis hurts (almost) everyone). The move, backed by former President Buhari, was meant to cut pre-election cash handouts by candidates. It triggered chaos in the markets, depressed voter turnout and damaged Tinubu's campaign.

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