By Estelle Shirbon

ABUJA, Aug 14 (Reuters) - The Nigerian central bank will remove all restrictions on current account transfers and make its naira <NGN=> currency fully convertible by Jan. 1 2009, Governor Chukwuma Soludo said on Tuesday.

The central bank will gradually phase out its dollar auctions, its main tool for managing the exchange rate, in favour of interbank dealing, Soludo told a gathering of journalists, government officials and diplomats.

It will distribute some fiscal oil revenues to the federal and state governments in dollars from next month to deepen the foreign exchange market, he added.

"As the market deepens, the central bank will gradually withdraw from the weekly Dutch auction system and only intervene in the market as may be required to achieve defined policy objectives," Soludo said.

Nigeria will also redenominate the naira from Aug. 1 next year, removing two zeros, so that 100 old naira will become 1 new naira, he said.

Before the announcement, the naira appreciated by 0.58 percent to 126.26 to the dollar as banks sold dollars on fears that the government would announce a major revaluation of the naira, traders said.

But the rate eased on the interbank market to 126.45 per dollar after the announcement as dealers noted the policy would not take effect until Jan. 2009.

"This is very positive. I agree fully with all the initiatives and more importantly the sequencing," said Tony Elumelu, head of UBA Plc, Nigeria's largest bank by balance sheet.

The naira has been appreciating steadily against the dollar this year thanks to high oil revenues, strong international reserves and a rising stock market. Analysts said they expected these changes to lead to a further appreciation.

RISKS

Soludo said the central bank was conscious of the risk of "undue appreciation" of the naira and would do everthing to avoid that. But he declined to comment on whether the bank would manage the rate using a band or specific target rate under the new policy.

Nigeria, the second largest economy in sub-Saharan Africa, partially deregulated its foreign exchange market in February 2006 to allow retail banks and the public more access to hard currency, but restrictions remain on many types of dollar transactions.

Easing restrictions on current account transfers means that companies will no longer need to provide documentation to receive dollars for a transaction related to trade.

However, Soludo did not say anything about easing restrictions on transferring capital into and out of the country, contrary to analysts' expectations.

Restrictions now in place include a requirement that imported capital should stay in the country for one year. This gives Nigeria some protection from speculative currency flows and capital flight.

The changes are in line with Nigeria's commitment to sign up to the International Monetary Fund's Article VIII, which says that no member shall impose restrictions on transfers for current international transactions.

An IMF team is due to visit Nigeria later this month.

Bismarck Rewane of Financial Derivatives Co. in Lagos said the plan to distribute fiscal oil revenues to the 36 state governments, which receive 24 percent of Nigeria's total income, would be a test of their capacity.

"They will need treasury management skills at a level of government where there is no capacity," he said. (Additional reporting by Tom Ashby and Oludare Mayowa in Lagos)

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Robot  Villager

# 1 ...Read the full article. Posted by Robot| 14.08.2007 14:01

udokaamah  Villager

# 2 Can someone please help me understand what this economic policy shift is all about. Is this an indication that the naira will be artificially placed on the same par with the US Dollar and other major foreign currencies? Why were currency traders rushing to sell off their US Dollar prior to this announcement? I am hoping this has nothing to do with dollarizing the naira and the Nigeria economy Posted by udokaamah| 14.08.2007 16:43

akuluouno  Villager

# 3 I am not an economist but a situation where $1 = N1.25 is not only undue appreciation of the Naira but will be ruinous in an economy lacking basic fundamentals and average productive capacity. Is the Naira not having delusions of grandeur akin to the proverbial baby chicken which looked into the mirror and saw a hawk.:mad::mad: Please let somebody tell Soludo that full convertibility is not the solution.:D:D:D Posted by akuluouno| 14.08.2007 17:05

Dumoliza  JJC

# 4 This makes an interesting topic for both academic and village square discussions. While academics will love to weigh the variables, the risks and returns of such convertibility, the not too enlightened Nigerians will be more concerned with the implication such a move will have on their financial status. I have always been an admirer of Prof. Charles Soludo right from my days as an undergraduate in the University of Nigeria, Nsukka. I particularly salute his courage and doggedness as regards consolidating the Nigerian Banking sector. However, after reading the subject write-up, a lot of things came to my mind. One of them is that I wonder how Soludo will convince my grandmother {and numerous Nigerians} to exchange her One Hundred Naira note for One Naira coin {may be note}. I can imagine the scenerio that will play out. I see confusion setting in. How well Soludo handles the issues that will come up in the nearest future will determine the success or failure of introducing such a project, but actualisation of the aim of this convertibility is dependent on other sectors of the economy. In my own opinion, I think what Nigeria needs at this moment is an entire functional system. The other sectors of the economy should catch up and move at par with the banking/financial sector. Otherwise the good intention of such an exercise may not be realised. The common man is yet to feel the impact of consolidation and increased capital base of most banks. An average business cannot access credit from the banks. I do not blame the banks as such because of the high risk of lending to a business : run on generator {24 hrs a day}; whose goods are not provided with adequate security; and business that cannot gurantee repeated turnover due to the declining purchasing power of its customers. Until the other sectors of the Nigerian econmy are reformed and functional, I am afraid, Nigeria and Nigerians may be worse off. Regards, Martin United Kingdom Posted by Dumoliza| 14.08.2007 17:58

oluye  Villager

# 5 You guys don't start exercising fears. Most likely, new naira notes will be printed. A new N1.00 note will have the buying capacity of an old N100.00, then the old notes will gradually be removed from the market. At the end of the day a bag of cement at say, N1000.00 will be purchased with N10 new notes. Those earning N40 000.00 will start going home with N400.00 new notes etc. So even if you go home with your dollar it will still have its power, at least for a while. Among other things, this will reduce the bulkiness of the naira and will also reduce govt expenditure on printing. While making the naira stronger in the West African sub region. Posted by oluye| 14.08.2007 18:18

Exxcuzme  Villager

# 6 =oluye;199736>You guys don't start exercising fears. Most likely, new naira notes will be printed. A new N1.00 note will have the buying capacity of an old N100.00, then the old notes will gradually be removed from the market. At the end of the day a bag of cement at say, N1000.00 will be purchased with N10 new notes. Those earning N40 000.00 will start going home with N400.00 new notes etc. So even if you go home with your dollar it will still have its power, at least for a while. Among other things, this will reduce the bulkiness of the naira and will also reduce govt expenditure on printing. While making the naira stronger in the West African sub region. If your point is true, I will like this! Posted by Exxcuzme| 14.08.2007 22:30

osaeloka  Villager

# 7 =oluye;199736>You guys don't start exercising fears. Most likely, new naira notes will be printed. A new N1.00 note will have the buying capacity of an old N100.00, then the old notes will gradually be removed from the market. At the end of the day a bag of cement at say, N1000.00 will be purchased with N10 new notes. Those earning N40 000.00 will start going home with N400.00 new notes etc. So even if you go home with your dollar it will still have its power, at least for a while. Among other things, this will reduce the bulkiness of the naira and will also reduce govt expenditure on printing. While making the naira stronger in the West African sub region. If =N=100.00 becomes =N=1.00 and =N=1.00 becomes =N=0.01 (or 1 kobo), what does =N=0.50 (or 50 kobo) become? And what happens to the price of those things that are currently sold for less than =N=1.00? How does Soludo's new story tie in with the Naira note changes of a few months ago? How many of all the justifications and objectives that were bandied about when the note changes were made have been achieved? Whatever happened to longterm, joined-up strategic thinking? And how long before we are told yet another story about some wonderful monetary policy measure that has been adopted in Brazil, Isreal, Ghana and Germany as we were are being told now and as we were told before the note changes? Posted by osaeloka| 15.08.2007 01:48

akuluouno  Villager

# 8 Dear Oluye et al, How I wish it were as easy as u guys are making it. I know this policy was tried in Poland and it worked because the fundamentals were there. Nigeria is always an exception to the rule and international benchmarks often get muddled in the malaise of Nigeria factor and other isms which we are all aware of. Oil still remains the bedrock of the economy and given the volatility of that product as well its corrupting influence in Nigeria, I wonder if our dear Naira can sustain a race with Dollar at the rate Soludo is proposing. I still submit that Soludo's arbitrary solidification of the Naira is not the solution.:biggrin::biggrin: Posted by akuluouno| 15.08.2007 04:54

bambo  JJC

# 9 Osaeloka : "If =N=100.00 becomes =N=1.00 and =N=1.00 becomes =N=0.01 (or 1 kobo), what does =N=0.50 (or 50 kobo) become? And what happens to the price of those things that are currently sold for less than =N=1.00?" It's quite obvious it's been long you were in naija. Nothing goes for less than =N=5.00 now, not even that bubble gum you mentioned. Posted by bambo| 15.08.2007 05:03

el_pharoah  Villager

# 10 I really don't understand what this means. Are we supposing that all the traders, producers, okada people, market forces etc. will "reduce" their prices voluntarily. How practical is that. Unless I'm getting this wrong. Won't people start to hoard naira etc.. I'm not quite sure how this will work. Posted by el_pharoah| 15.08.2007 05:36

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