Lagos: Nigeria's naira slumped 30 percent against the dollar on Monday after the central bank removed its currency peg to alleviate chronic foreign currency shortages choking growth in Africa's biggest economy.
The naira had traded just twice by midday, at 255 to the dollar, before the central bank launched a special auction to clear a backlog of hard currency orders.
Less than $1 million changed hands, prompting an extension of the trading day to 5 p.m.(1600 GMT), dealers said.
The central bank sold $530 million at the auction at 280 naira per dollar with 21 banks participating, traders said.
Monday's rate was sharply weaker than the 197 peg the central bank had maintained for 16 months before abandoning it last week in a bid to alleviate chronic forex shortages and stop the economy from sliding into recession.
Black market currency dealers were quoting the naira at between 325 and 345 naira to the dollar, up to 10 percent stronger than on Friday on expectations more forex liquidity on the interbank market would reduce demand on the street.
The central bank has said it may inject foreign exchange into the interbank market to boost liquidity and reduce a backlog of $4 billion backlog of demand which could take four weeks to clear.
Non-deliverable forwards -- contracts used to bet on future exchange rate moves -- priced the naira at 295 per dollar in one month's time after initially hitting its weakest ever level at 310.
The two-month contract < NGN2MNDFOR=> saw the naira at 304 per dollar in August while one year down the line < NGN1YNDFOR=> the naira was priced at 349.
Nigeria's central bank is "reasonably optimistic" the naira will settle at around 250 to the dollar after an initial period of weakness following a flotation, the bank's governor said in a June 3 letter to President Muhammadu Buhari.
Foreign investors and economists had called for a naira devaluation for months as the forex shortages hit economic growth and led to widespread capital flight.
The central bank said last week it would abandon the peg in a "managed float".The median forecast from 10 analysts surveyed by Reuters had suggested it could trade on Monday at many as 300 naira per dollar.
Nigeria's economy, which contracted by 0.4 per cent in the first quarter, faces its worst crisis in decades as a result of the decline in oil prices since 2014 and last year's introduction of a currency peg.
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 is likely to light a fire under already rising inflation.
"The new system should reduce the shortage of FX in the economy and -- in the long run -- reduce strains in the balance of payments by discouraging imports and boosting export competitiveness," said John Ashbourne of Capital Economics.
"But the new system certainly does not mark the end of Nigeria's economic problems."
The OPEC oil exporter had resisted devaluing the naira for more than a year, even as other major oil producers, including Russia, Kazakhstan and Angola, allowed their currencies to fall after crude prices collapsed.