What’s floating of Naira and how does it affect Nigerians?
On Wednesday, June 14, 2023, after weeks of speculation, the Central Bank of Nigeria (CBN) announced the unification of all exchange rates in the country, thereby putting an end to the disparity between the official rate and the unofficial rate known as the parallel market rate.
“All segments are now collapsed into the Investors and Exporters (I&E) window,” the statement by Angela Sere-Ejembi, Director of Financial Markets at CBN, reads in part.
The I&E window operates as a special trading platform where investors, both local and foreign, can freely buy and sell foreign currencies, primarily the United States dollar (USD), Nigerian naira (NGN), and other major currencies. It allows for a market-determined exchange rate, where rates are determined by the forces of supply and demand in the market.
The new directive from CBN comes five days after President Bola Tinubu indefinitely suspended the former Governor of the apex bank, Godwin Emefiele, it is also in line with Tinubu’s May 29, 2023, inaugural promise of unifying the country’s exchange rate.
“Monetary policy needs a 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,” he said.
What does the floating of the Naira mean?
The floating of the naira is a term used to describe a monetary policy decision made by a country’s central bank, in this case, the Central Bank of Nigeria (CBN), to allow the exchange rate of the Nigerian currency (naira) to be determined by the forces of supply and demand in the foreign exchange market. Instead of fixing or pegging the value of the naira to a specific foreign currency, such as the US dollar or Euro, the exchange rate is allowed to fluctuate based on market dynamics.
The decision to float the naira can have several effects on Nigerians, both positive and negative, which are important to understand.
How it will affect Nigerians’
Exchange Rate Volatility: When the naira is floated, its value against other major currencies can fluctuate more freely. This can lead to increased exchange rate volatility, meaning that the value of the naira can change rapidly. The impact of this volatility is felt by consumers, especially when purchasing imported goods. If the naira depreciates significantly, the cost of imported products may rise, making them more expensive for Nigerians.
Reacting to the floating of the naira, Kingsley Moghalu, a former Deputy Governor of CBN, said, “the deregulation of the forex market by CBN is a good move. I have long been an advocate of floating the naira. In what universe does a central bank have multiple exchange rates and hope that the country’s economy can prosper? Only in the ‘arbitrage’ universe of vested interests.”
Inflation: Exchange rate fluctuations resulting from floating the naira can impact inflation rates in Nigeria. If the naira depreciates, it can increase the cost of imported goods, including essential commodities such as food and fuel. As the prices of these goods rise, it can lead to higher overall inflation, affecting the cost of living for Nigerians.
“The floating of the naira would impact inflation, foreign debt obligations, and exchange rate volatility,” said Olumide Adesina, a financial analyst.
With the floating of the naira, Nairametrics reported that Nigeria’s total public debt rose by fiat to ₦82 trillion from ₦73 trillion before the unification.
Foreign Investment: Floating the naira can affect foreign investment in Nigeria. If the naira depreciates, it can make Nigerian assets, such as stocks and bonds, relatively cheaper for foreign investors. This can potentially attract foreign investment and stimulate economic growth.
According to data from the National Bureau of Statistics, Nigeria recorded only $5.33 billion in capital importation inflow in 2022, the lowest since 2017.
It is believed that the unification of the exchange rate will reassure foreign investors who will commit to investing in Nigeria.
Export Competitiveness: Floating the naira can impact the competitiveness of Nigerian exports in the global market. If the naira depreciates, it can make Nigerian goods relatively cheaper for foreign buyers. This can boost export revenues and contribute to economic growth, particularly in sectors such as agriculture, manufacturing, and oil exports.
However, Aja Kalu, a financial analyst, while explaining that Nigerians will pay higher prices for imported goods, noted that floating the naira might open business opportunities for local production.
“Your job now is to look for an imported item that Nigerians like. The cost of that item is going up. Can you make it locally cheaper? If yes, that’s a business opportunity,” he said in a tweet.
Diaspora Remittances: Floating the naira can affect remittances sent by Nigerians living abroad to their families back home. When the naira depreciates, it can increase the value of remittances in local currency terms, benefiting recipients. However, if exchange rate volatility is high, it can create uncertainty for remittance senders and potentially reduce the value of remittances.
Diaspora remittances remain a source of foreign exchange (FX) for Nigeria. In 2018, Nigerians living abroad remitted a total of $24 billion to their friends and relatives in Nigeria.
