Nigeria's central bank said on Wednesday it would begin "purely" market-driven foreign currency trading next week, abandoning its 16-month peg and setting the stage for the naira to fall sharply.
Nigeria's central bank previously pegged the naira at 197 to the U.S. dollar but the currency trades at about half that on the black market as slump in oil revenues has hammered public finances and foreign currency reserves. The new trading rules begin on Monday, Central Bank Governor Godwin Emefiele said.
The change of tack is a "managed float" and puts Nigeria in line with most central banks, including the Bank of England, a senior central bank official told Reuters. Nigeria's central bank has no target for the naira, he said.
The latest interbank level will be posted on the central bank's website daily from Monday, the official said, adding: "The old rate of 197 does not exist anymore."
Following the announcement, three economists estimated the fair value of the naira between 280 and 300 against the dollar, although the black market rate is around 370.
Nigeria, Africa's largest crude exporter, has resisted devaluing its currency for more than a year despite other major oil producers, including Russia, Kazakhstan and Angola, allowing currencies to fall amid lower crude prices.
The central bank will still be able to inject dollars into the market, giving it some control over the exchange rate within the limit of its foreign reserves which fell to $26.7 billion in June, from $42.8 billion in January 2014.
Emefiele hopes opening up trading will ease severe U.S. dollar shortages caused by a slump in oil revenue.
With a likely sharp fall for the naira, Nigerian products will become relatively cheap and imports more expensive, which should stimulate the domestic economy but also lift inflation.
"To improve the dynamics of the market, we will introduce foreign exchange primary dealers who would be registered by the CBN (central bank) to deal directly with the bank for large trade sizes on a two-way quote basis," Emefiele told reporters.