What is Exchange rate unification and how does it affect Nigerians?
A few days after President Bola Tinubu announced in his May 29, 2023, inaugural speech that his administration would pursue a unified exchange rate, Nigeria’s stock market experienced a notable surge of 5.2%. Additionally, trading volumes saw a significant increase of 133.5%.
“Monetary policy needs thorough housecleaning. The Central Bank must work towards a unified exchange rate. This will direct funds away from arbitrage into meaningful investment in the plant, equipment, and jobs that power the real economy,” President Tinubu said on May 29, 2023, during his inaugural address.
But what is an exchange rate?
An exchange rate is the value at which one currency can be exchanged for another currency. In Nigeria, the value of the naira is often measured by its rate with the US dollar. While exchange rates are determined by the foreign exchange market, which is influenced by various factors such as supply and demand for currencies, interest rates, inflation rates, political stability, and economic conditions, the naira has, for many years, been valued by two rates: the official rates and the unofficial rate known as the parallel market rate.
In 2021, the CBN accused Abokifx, a website that publishes parallel market rates online by collating different rates at which Naira/Dollar is being traded, of participating in “illegal activity that undermines the economy.” In response, Abokifix suspended forex updates, but the value of the naira, which was about ₦560/$1 (parallel rate) in December 2021, has depreciated further in the black market to ₦740, according to various sources examined by Neusroom.
How Exchange Rate Unification will affect Nigerians
Tinubu’s exchange rate unification plan is expected to bring together the official and parallel rates. It will involve eliminating or reducing the gap between the official exchange rate and the parallel market exchange rate.
Although a Nigerian national daily, Daity Trust newspaper reported on May 31, 2023, that the CBN has devalued the Naira to N631 to the dollar from N461.6, on June 1, 2023, the CBN debunked the report and maintained that the exchange rate remains ₦461.92/$1. The newspaper has challenged the apex bank to provide any facts contrary to the contrary as it stands by its report.
At the commissioning of Dangote Refinery on May 22, 2023, CBN Governor Godwin Emefiele said that the CBN provided about ₦125 billion for domestic currency requirements while “ensuring the availability of foreign exchange (FX) to pay for imported equipment.” It is believed that the FX provided for Dangote was at the official rate. However, ordinary Nigerians, importers, exporters, and students who want to pay their abroad tuition fees often obtain it at the unofficial rate, which is over 60% higher than the CBN rate.
It is believed that unifying the different exchange rates in Nigeria, will help promote transparency and reduce the distortions caused by multiple exchange rates. By establishing a single exchange rate, it simplifies foreign exchange transactions and provides a more accurate reflection of the currency’s value in the international market.
Also, exchange rate unification can help attract foreign direct investment (FDI) by providing greater clarity and stability for investors. A unified exchange rate reduces uncertainty and eliminates the arbitrage opportunities associated with multiple exchange rates, making the business environment more predictable and attractive.
“A currency cannot maintain strength when there is a spread of over 60% between the formal and informal markets,” Dr. Paul Okorie, Chief Executive of Cashlinks, said in reaction to Tinubu’s inaugural address on the exchange rate.
Additionally, it is believed that having one exchange rate in Nigeria can encourage local production and industrialisation. With a more competitive exchange rate, domestic industries may find it easier to import necessary raw materials and equipment, supporting their growth and creating employment opportunities. It can also promote exports by making Nigerian products relatively cheaper in international markets, thereby boosting foreign exchange earnings.
However, there could be some short-term negative effects on Nigerians. Initially, unifying the exchange rate may lead to a significant depreciation of the naira, causing imported goods and services to become more expensive. This, in addition to the fuel subsidy removal, which resulted in an increase in petrol prices, can result in inflationary pressures and increase the cost of living for individuals.
