Indicators emerged yesterday that President Bola Ahmed Tinubu’s promise to carry out monetary policy reforms, particularly to ensure a single exchange rate for Nigeria has begun to be effected.
The new management of the Central Bank of Nigeria (CBN) yesterday adopted a clean float foreign exchange management, a possibility it foreclosed for years.
In a press statement signed by its director in charge of financial markets, Angela Sere-Ejembi, the CBN announced immediate changes to operations in the Nigerian Foreign Exchange (FX) market.
The CBN re-introduced the “willing buyer, willing seller” model at the I&E window. Operations in the window are guided by the extant circular on the establishment of the window, dated 21 April, 2017 and referenced FMD/DIR/CIR/GEN/08/007. “All eligible transactions are permitted to access foreign exchange at this window,” the bank said in the statement.
This latest policy has therefore put an end to the “Naira for dollar” incentive regime.
The CBN under Emefiele had introduced the Naira4Dollar scheme to encourage processing of foreign exchange remittance through official means by giving N5 for every dollar remitted into the country.
Leadership reports that the money market has started reacting to the development. The newspaper observed yesterday that the value of the naira plunged to N664.04 to the dollar at the official window whilst gaining marginally at the parallel market as analysts say the free float of the foreign exchange could lead to an easing of the supply challenge in the market.
From N474 to the dollar at which the dollar closed at the I&E window on Tuesday, it closed 28.61 per cent weaker at N664.04 as the naira gained N5 at the parallel market to close at N755 from N760 which it began Wednesday’s trading activity.
Foreign exchange traders at the parallel market became jittery following reports of a free float of the naira, as commercial banks and dealers in the forex market said they have been given the green light to sell forex freely, at a market-determined rate.
President Bola Ahmed Tinubu had in his inaugural speech emphasized the need to harmonise foreign exchange rates in the country. He had stated that “monetary policy needs thorough house cleaning.
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.”
With the floating, currency hawkers say they are unsure of which way the market will swing in the coming days with the latest news.
“We bought at N760 on Tuesday but now we are selling at N760, which is almost a loss. So, we are careful until we know which direction the market is going,” one dealer said.
“the liberalisation of the foreign exchange market would unlock the huge potential for investment, jobs and capital flows. Investor confidence would be positively impacted.
“This is a giant stride in deregulating the economy, coming at the heels of subsidy removal. The structural rigidities in the economy and pressure points are gradually being eliminated,” he added.
The free float of the naira means the government or a monetary authority like the CBN no longer determines the exchange rate.
It also means that the exchange rate at every point in time would be determined by the interaction of the market forces of supply and demand for foreign exchange.
Simply put, the rate at which the naira gets exchanged for any foreign currency would be dependent on the agreed price reached by the buyer and the seller.
The naira float will affect all Nigerians directly or indirectly because Nigeria is an import dependent nation and what added cost incurred by product suppliers will be passed to the final consumers.
Since the hope of many is that the floating of the nation’s currency will improve liquidity and stability in the market and attract foreign investors into the Nigerian economy as it will be determined by ‘Willing Buyer,’ ‘Willing Seller’ principle, Nigerians applying for personal travel allowance (PTA), Business Travel Allowance (BTA), medicals, school fees expect to access FX depending on supplies.
As the CBN yesterday announced that it has abolished the segmentation of the FX market into different windows and all transactions will now be done through the Investors and Exporters (I&E) window, where the exchange rate will be determined by market forces, applications for medicals, school fees, BTA/PTA, and SMEs, according to the apex bank, would continue to be processed through deposit money banks.
The floating of the naira means people can get forex at the banks for whatever rate the banks can afford to sell it. Banks and other institutions can now buy and sell dollars at their own rate. This will widen access for people as everybody doesn’t have to meet CBN for forex.
It is a simple economics that since the previous practice of the CBN pumping dollars in the FX market (from the reserves, which also depleted them) is essentially a subsidy for imports, which has made Nigeria more and more import dependent, letting go of the subsidy on the Naira will refocus the economy towards exports.
This will create an incentive for complex production of a quality that can be competitive in the international market which could boost activities in the SME sector. This, however, must be supported with right trade policies to create such incentives for massive exports of finished, value added goods from Nigeria.
According to analysts, the naira float could have positive and negative effects. A free market could cause fluctuations in imports and exports, but these can now be tracked and easily predicted from market events. Argentina and Egypt are examples of countries that floated their currency. It initially led to sharp increases in the cost of goods and services, but exports and foreign investments eventually helped maintain stability.
[Leadership]
