18 Jun 2023
The currency float is meant to help close the gap between official and black market exchange rates
The decision by the Central Bank of Nigeria (CBN) to float the naira freely has come with an unwanted outcome: a historical fall of the value of the currency against the US dollar.
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Intended to curb dollar scarcity and curtail parallel forex exchange markets, the move has sent the naira down by 36% on the official market on June 14. The new policy removed trading restrictions on the official market, forcing the naira to go from 477 per US dollar on June 13 to 750 on June 14. As of June 15, the black market rate stood at 760 per US dollar.
As buyers and sellers of foreign currency in the official forex market continue to quote rates they find comfortable, compared to previous practice where rates were dictated by the Nigeria central bank, the naira could reach 800 against the US dollar.
Though it remains a wait-and-see situation, analysts expect the currency float to help close the gap between official and parallel market exchange rates, boost investor confidence, increase foreign inflows, reduce import costs, and ease pressure on the naira.
Quotable: The upside of a floating naira
“Given that this new rate in the official market is the same as the parallel market, there is no incentive for people and businesses with genuine transactions to patronize the parallel market, hence FX trading activity in the parallel market will slow down significantly,” Abiola Rasaq, an economist and former head of investor relations at United Bank for Africa quoted in Business Day on June 14
Change is afoot
The move to float the naira came just days after Nigerian president Bola Tinubu suspended the embattled central bank governor Godwin Emefiele, during whose term the black market for foreign exchange thrived. Allegations of corruption forced Emefiele into self-exile abroad in January.
Following his suspension, the local banking index surged 23% on June 14, a 20-year high, as investors rushed to trade shares of banking institutions. More than 10 stocks gained 10% on June 14 as demand in the Nigerian stock market soars.
However, the willing-buyer-willing-seller mode of forex trading could hurt the economy in the long term, analysts say, and achieve the exact opposite of what the CBN targeted, as sellers seek to offload their US dollars to the highest bidders.
Fiscal policy partner PWC Taiwo Oyedel told local publication the Punch that the government’s “external debt of $42 billion will increase by the difference between the old and new rates.” He also warned that state’s coffers could suffer: “Corporate tax collection may decline as many businesses crystallize forex losses due to the higher exchange rate.”