The Central Bank of Nigeria (CBN) recently announced that it has directed Deposit Money Banks (DMBs) to eliminate the rate cap on the Nigerian naira, signaling a move towards floating the currency. This is a significant development, as it could have a major impact on the Nigerian economy.
Nigeria is Africa’s largest economy, and its currency, the naira, is the second most traded currency on the continent. The CBN has been managing the naira’s exchange rate for many years, and it has used a variety of methods to do so, including pegging it to a specific exchange rate. However, this has led to the creation of two exchange rates: the official rate and the black market rate. The disparity between the two rates has created opportunities for corruption and speculation, and it has also made it difficult for businesses to operate.
Floating the naira would allow the currency to trade freely on the foreign exchange market. This would remove the CBN’s control over the exchange rate, and it would allow the market to determine the naira’s value. There are both potential advantages and risks to floating the naira.
On the one hand, floating the naira could help to improve the country’s export competitiveness. This is because businesses would be able to get a better exchange rate for their exports, which would make them more competitive in international markets. Floating the naira could also help to attract foreign investment. This is because foreign investors would be more likely to invest in Nigeria if they were confident that the naira’s value would not be volatile.
Floating the naira could also lead to increased inflation. This is because the naira would be more likely to depreciate, which would make imported goods more expensive. Floating the naira could also lead to social unrest. This is because the depreciation of the naira would hurt the poor and the middle class, who would have to pay more for goods and services.
The CBN has said that it will carefully monitor the impact of floating the naira, and it will take steps to mitigate any negative consequences. However, it is clear that this is a major decision with far-reaching implications. Only time will tell whether floating the naira will be a success or a failure.
Has the CBN truly unified the Naira exchange rate?
To the ordinary Nigerian, this would mean that the black market no longer exists and they can walk into their local bank and buy forex at the prevailing exchange rate. However, this is not the case, there still exists a disparity between the official exchange rate and the black market rate – which is still very much in existence. Even according to the CBN circular announcing the unification, the document still mention that intervention schemes such as BTA and PTA will continue to be processed through the Investors’ and Exporters’ (I&E) Window of the foreign exchange market.
This means that the delays and bottlenecks in the official window that forces most people to patronise the black market is being retained.
The Investors’ and Exporters’ (I&E) Window of the foreign exchange market closed at around N655/$ last Wednesday while most black market bureau de change operators were selling the dollar atN750.
These are still early days and perhaps the CBN will come up with explanations and solutions to these disparity.
Implications of Nigeria floating its currency
Firstly, experts agree that floating the naira would likely lead to increased exchange rate volatility. In a floating exchange rate system, the value of the currency is determined by market forces such as supply and demand.
This means that the naira’s value would fluctuate in response to economic factors, including inflation, interest rates, and foreign investment. While this volatility can be unsettling in the short term, it can also help promote economic adjustments and improve competitiveness in the long run.
Floating the naira can also boost export competitiveness. When the naira is allowed to float freely, its value may depreciate, making Nigerian goods and services relatively cheaper for international buyers.
This can stimulate export-oriented industries, increase foreign exchange earnings, and potentially reduce the country’s reliance on oil exports. It would encourage diversification of the economy and help build a more sustainable and resilient economic structure.
In addition, floating the naira carries the risk of inflationary pressures. If the value of the naira depreciates significantly, it can lead to higher prices for imported goods and raw materials, which could translate into increased costs for businesses and consumers.
The Central Bank of Nigeria would need to implement effective monetary policies, such as interest rate adjustments and tight fiscal measures, to manage inflation and maintain price stability. So, all eyes are naturally on the Acting CBN Governor to get a sense of his leanings.
Moreover, floating the currency could impact Nigeria’s external debt and financial stability. If the naira depreciates, the country’s foreign debt obligations in other currencies, such as the US dollar, would increase when converted to naira.
This can potentially strain the government’s ability to service its debt. Nigeria’s total public debt stock as of March 2023, was N46. 25 trillion, excluding the estimated N27. 55 trillion ‘Ways and Means’ loans from the Central Bank.
Besides, increased exchange rate volatility may lead to capital flight and reduced investor confidence, which could pose risks to financial stability.
Furthermore, floating the naira can be seen as a sign of economic reforms and attract foreign investment. A flexible exchange rate system signals a willingness to embrace market-driven policies, which can instil confidence in international investors.
By allowing the naira to find its value, the Nigerian government may create an environment conducive to foreign direct investment (FDI), which can spur economic growth, technological advancements, and job creation.
One thing is clear, floating the currency would have socioeconomic implications for Nigerians. While it can enhance export competitiveness and potentially attract investment, it may also lead to short-term economic disruptions. It would impact the purchasing power of citizens, affecting their ability to afford essential goods and services. Mitigating these effects would require robust social safety nets, targeted interventions, and policies to protect vulnerable populations during the transition.
How the government can cushion the impact of currency floating on every Nigerian
The much as floating the currency is a necessary step the government needs to take for the long term health of the Nigerian economy, it also has to implement several measures and policies to mitigate the potential negative effects.
Here are some potential steps that can be taken:
Social Safety Nets and Welfare Programs: Strengthen existing social safety net programs or introduce new ones to support vulnerable populations, ensuring their basic needs are met during economic transitions.
Price Control Mechanisms: Regulate prices on essential goods and services to prevent excessive price hikes resulting from exchange rate fluctuations.
Investment in Infrastructure: Improve infrastructure to stimulate economic activity, create jobs, and improve living conditions.
Skill Development and Job Creation: Prioritize skill development programs, vocational training, and entrepreneurship support, and create an enabling environment for small and medium-sized enterprises (SMEs).
Support for Agriculture: Provide targeted support to the agricultural sector to enhance productivity, reduce reliance on imports, and stabilize food prices.
Investor Confidence and Economic Reforms: Implement structural reforms that enhance transparency, reduce bureaucracy, and improve the ease of doing business to attract domestic and foreign investment.
Financial Inclusion and Access to Credit: Facilitate access to financial services and credit, promoting financial inclusion and empowering individuals and businesses to navigate economic uncertainties.
Education and Healthcare: Allocate resources to improve the quality and accessibility of education and healthcare services.
Communication and Public Engagement: Effectively communicate policies, strategies, and the reasons behind floating the currency, engaging with the public, providing information, and encouraging dialogue to help manage expectations, address concerns, and build trust among citizens.
Evidently, cushioning the impact of currency floating on every Nigerian requires a comprehensive approach. By implementing these measures, the government can mitigate the adverse effects and create an environment of stability and resilience for its citizens.
Floating the naira presents a complex decision for the Nigerian government. While it holds the potential to enhance export competitiveness, attract investment, and signal economic reforms, it also carries risks such as increased exchange rate volatility and potential inflationary pressures.
The CBN’s move to float the naira is a significant development that could have a major impact on the Nigerian economy. There are both potential advantages and risks to floating the naira, and it is important to carefully monitor the impact of this decision. Only time will tell whether floating the naira will be a success or a failure.