Nigeria floats the Naira- what it means for you and me
Dr. Toyin F Sanni
Founder, Emerging Africa Group / Finance & Investments, LinkedIn Top 250 Influencer
In an unprecedented move and another daring reform initiative by its new leadership under President Bola Ahmed Tinubu, Nigeria has, through the Central Bank of Nigeria, given commercial banks and forex market dealers permission to freely sell forex at market-determined rates, aligning with President Bola Tinubu's commitment to unify exchange rates. This suggests that Nigeria is transitioning to a freely floating exchange rate system.
The expected impact of this bold move will include but not be limited to the following:
*1. Market-Based Rate:* The exchange rate for the Naira will be determined by the forces of supply and demand, reflecting the true value of the naira against the dollar and other major currencies more accurately and rapidly eliminating the erstwhile multiple rates regime.
*2. Exchange Rate Volatility:* The shift to a freely floating exchange rate system can introduce increased volatility in the currency market. The exchange rate may fluctuate more frequently and by larger magnitudes, which can pose challenges for businesses, consumers, and investors. It becomes crucial for market participants to closely monitor exchange rate movements and adjust their strategies accordingly to mitigate potential risks.
*3. Transparency and Fair Pricing:* With a single market rate, there is less incentive for individuals and businesses to resort to the parallel market. Transparent pricing reduces the risk of unofficial rates and scams. Accordingly the parallel or "black market" is expected to shrink / lose patronage and ultimately disappear except for illicit purposes.
*4. Enhanced Availability:* Allowing commercial banks and forex dealers to freely sell forex can enhance the availability of foreign currency in the market. This can potentially address the issue of limited supply to some extent, making it easier for individuals and businesses to access foreign exchange for legitimate transactions. The increased availability can facilitate smoother cross-border trade and investment activities. In essence, the banks and forex dealers who now have a free hand to set their prices based on market dynamics and not by regulatory fixing, will no longer be incentivised to move the dollars at their disposal to the black market for larger margins. This will improve the supply of dollars in these official channels.
*5. Reduced Arbitrage Opportunities:* Reduced and ultimately elimination of differential rates and the arbitrage opportunities presented by them is expected. The gap between official and parallel market rates is expected to narrow, making parallel market activities less profitable.
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*6. Implications for Inflation and Interest Rates:* The depreciation of the Naira resulting from a freely floating exchange rate can have implications for inflation and interest rates. A depreciating currency tends to increase the cost of imported goods, which can contribute to higher inflation. To manage inflationary pressures, the central bank may opt to tighten monetary policy by raising interest rates. This can impact borrowing costs for businesses and individuals, potentially influencing investment decisions and overall economic activity.
7. Return of Foreign Investments - The restoration of free access to foreign exchange for repatriation of investment proceeds and returns along with other moves towards liberalisation and free market economy by the new Nigerian government is a potential factor in favour of the return of foreign direct and foreign portfolio investments to Nigeria alongside other anticipated moves such as improved security, infrastructure and judicial system reforms.
While the complete elimination of the parallel market may take time, gradually reducing its prevalence is possible through increased confidence in the official market, exchange rate stability, and effective regulation.
Conclusion
Overall, the move towards a freely floating exchange rate system in Nigeria has the potential to bring about positive changes in the forex market, benefiting individuals, businesses, and the overall economy.
Explicitly said and broken down.. Thank you ma'am. My only concern is, This is not the first time the naira would be floated, it happened in 2016 and in previous years...The result has been further economic troubles.. I believe the lasting solution to our Fx issues is to boost our local production, boost our exports so we can improve our foreign earnings.....We are yet to see a concrete plan by the CBN to address this...
My big challenge here is market rate volatility. It is well.
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1 年Thank you so much for this enlightening piece.
A specialist with invaluable knowledge in Transportation projects, logistics,Administration, Transport planning,inventory,and distribution,
1 年Well said Ma!
Senior Software Development Engineer @Bit Addict
1 年The analysis covers all the angles. Point 5 in the list was always an issue in the outgoing system due to the large spread between the official bank rate and the rate down town. This created arbitrage opportunities for those with access to good connections at the banks viz sell your foreign currency down town, pay it into your bank account, buy more foreign currencies at a cheaper rate through your connection. You get very high yield contingent on you having the right connections at the banks. Now going foward the issue that could plague the new arrangements will be volatility as you rightly pointed out. This could be a destabilizing issue in the FE market if the regulations are not well stipulated, put in place and enforced. Using algorithmic trading mechanisms could result in a highly volatile FE market. It is not going to be beautiful. It will be ugly if not carefully managed. Free markets are usually not so perfect; therefore self regulation by the market could have the tendency to yield undesirable consequences. Case in point is the failure of self regulation from 2008.