LONDON A currency devaluation may do little to fix Nigeria's problems unless it follows the examples of emerging market peers Egypt, Argentina and Russia and embraces floating exchange rates.
Grappling with recession, widespread dollar shortages, a budget funding gap and international lenders' reluctance to provide loans, Nigeria has moved tentatively to devalue its currency.
The naira traded as low as 375 per dollar on Monday versus the official rate of 305, although that was still far stronger than black market levels around 450.
Such crises have occurred time and again in emerging markets, as countries are forced to ditch currency pegs, often after weeks or months of resistance that drains central bank coffers and sends the economy into a tailspin.
But as Nigeria itself shows, currency reform cannot be half-hearted. Last June, authorities devalued the naira by 30 percent only to then return it to its straitjacket. Within days, dollar hoarding and currency black markets re-appeared and a stock market rally quickly fizzled.
"The critical issue for Nigeria is a move to proper currency flexibility, not devaluation per se. The June 2016 devaluation demonstrates that," said Hasnain Malik, head of frontier markets strategy at Exotix in Dubai.
"The majority of foreign institutional investors...cannot allocate new money to Nigeria if it is going to be trapped by capital controls."
But analysts reckon Nigeria will again opt to weaken the naira while refraining from a free float and retaining curbs on capital moving in and out of the country.
That will inevitably draw comparisons with Egypt, which is starting to reap the benefits of last November's move to unshackle the pound and loosen its curbs on the free movement of capital.
Other countries that have made the switch to free-floating currencies without capital controls in recent years are Argentina in 2015 and Russia in 2014.
"A devaluation will happen in Nigeria, but a float is quite unlikely, and a float is the ideal scenario," said George Birch Reynardson, fund manager at Somerset Capital which holds just one Nigerian stock in its portfolio.
Reynardson sold most of his Nigeria holdings last November but was able to repatriate the proceeds only last week. While devaluation could temporarily ease dollar shortages, he said "no one really has any interest in investing there."
FLOAT LIKE AN EGYPTIAN
Nigeria's economic frailties were laid bare by the mid-2014 oil price collapse. Before that it had basked in the 'Africa Rising' hype gripping investors.
In mid-2013, foreigners held $11.6 billion or a quarter of total Nigerian debt and some $10.3 billion in equities .NGSEINDEX.
Much of that money fled after capital controls were imposed in 2015. By last October, daily equity trading volumes were a third of their 2013 levels, with foreigners' share dwindling to half from 70 percent, stock market data showed.
That will fall further if index provider MSCI fulfils its threat to drop Nigeria from its frontier equity benchmark. The country has already lost its place in the GBI-EM emerging debt index, a benchmark for funds managing about $200 billion.
Malik says Egypt shows why Nigeria should bite the bullet on currency reform.
The Egyptian pound crashed 50 percent after the float and inflation has hit decade-highs. But the currency has subsequently bounced 20 percent off lows, bank deposits are growing and remittances have jumped a fifth year-on-year in the three months after devaluation.
And Egyptian stocks and bonds - investor favorites before the 2011 Arab Spring - are luring buyers again.
Russia and Argentina, while still enduring hardship, are also receiving buoyant capital inflows, with the latter rejoining mainstream equity and bond indexes this year.
"What Egypt does show is that foreign capital is comfortable pricing risk and returning to a market when there is a liquid, functioning foreign currency market for all," Malik added.
Unlike Egypt, Nigeria will not accept an International Monetary Fund program. It lacks Russia's reserves war chest and President Muhammadu Buhari lacks the appetite for the orthodox economic policies his Argentine counterpart has implemented since 2015.
But on the plus side, Nigerian government debt is 15 percent of annual economic output, a sliver compared with 86 percent in Egypt, according to IMF data. Its current account is also almost in balance, putting it in a better position than Egypt, where the IMF expects to see a 5 percent deficit this year.
Most crucially, the naira may not be as out of kilter with its real fair value as the pre-devaluation pound.
Renaissance Capital, for instance, suggests the naira's fair value is around 365 per dollar in today's money, based on an analysis of a 20-year history of inflation-adjusted exchange rates measured against trade partners' currencies.
The naira's black market discount is due to a "crisis of confidence, RenCap said. So an initial post-devaluation overshoot may be followed by a bounce once the central bank clears the dollar demand backlog.
Somerset's Reynardson notes also that unlike Argentina, Egypt and Russia, Nigeria's 20 percent inflation level probably already reflects effects from a weaker naira because companies have been passing on higher input costs from black market exchange rates.
"If there is a float as well as a devaluation, I think foreign investors will definitely come flooding back in," he said.
(Additional reporting by Karin Strohecker in London and Chijioke Ohuocha in Lagos; Editing by Hugh Lawson)