In a move to float the foreign exchange market, the Central Bank of Nigeria (CBN) announced measures that led to a sharp depreciation of the Nigerian Naira. The exchange rate in the Investors and Exporters (I&E) window soared from N471.67 per dollar on Tuesday to N664.04 per dollar on Wednesday. The new measures include the elimination of multiple exchange rates and the adoption of a “willing buyer, willing seller” model.
According to Dr. Angela Sere-Ejembi, the Director of Financial Markets at the CBN, all segments of the foreign exchange market have now been collapsed into the I&E window. However, applications for specific purposes such as medicals, school fees, BTA/PTA, and SMEs will continue to be processed through deposit money banks. The operational rate for government-related transactions will be based on the weighted average rate of the preceding day’s executed transactions at the I&E window.
Analysts interpret these measures as a move towards floating the Naira and allowing the exchange rate to be determined by market forces. This change is expected to eliminate multiple exchange rates, arbitrage, round-tripping, and other malpractices while increasing foreign exchange inflows into the country. It is projected that the government’s revenue could improve by approximately N4 trillion as a result of these measures.
However, experts caution that this move could also lead to a further increase in the prices of goods and services. Additionally, it is anticipated that the government’s debt could rise by approximately N12 trillion to N90 trillion, which would also increase the cost of servicing the nation’s debt and elevate the debt-to-GDP ratio.
Despite the depreciation in the official market, the Naira saw a slight appreciation in the parallel market, where the exchange rate dropped from N768 per dollar to N755 per dollar.
Investment bankers and analysts believe that the immediate impact of the directive will be increased foreign exchange inflows and a rise in the inflation rate. They expect the I&E exchange rate to settle at around N730 to N740 per dollar in the coming days, with the possibility of the Naira eventually appreciating if liquidity flows into the market. However, the elimination of the official exchange rate and the higher exchange rate for all transactions could lead to higher prices of goods in the country.
On the positive side, floating of the foreign exchange market is expected to unlock investment potentials, boost government revenue by N4 trillion, enhance liquidity, reduce uncertainty, minimize discretion and arbitrage, and increase transparency in the allocation of foreign exchange.
While some analysts welcome the move, others criticize the decision to retain forex restrictions on certain items, stating that it could create room for parallel market transactions and hinder the unification process. They argue that a unified exchange rate regime should cover all legitimate transactions.
Experts suggest that the government needs to manage the dynamics carefully to restore confidence and address the backlog of forex demands. They recommend relaxing capital control measures, removing administrative bottlenecks, and taking additional measures to prevent the parallel market rate from diverging further from the official market rate.
Overall, the implementation of these measures is expected to have significant implications for the Nigerian economy, reshaping the foreign exchange market and influencing various sectors, including trade, investment, and government finances
As this policy begins to take shape, it impacts the purchasing power of individuals and households. Imported goods will become more expensive, leading to higher prices for essential commodities, including food, fuel, and medications. This places an added burden on everyday Nigerians, especially those with limited income or living below the poverty line. Additionally, the devaluation may lead to inflationary pressures, further eroding the value of savings and making it harder for people to meet their basic needs. The effects of these developments can be particularly challenging for vulnerable populations, exacerbating inequality and potentially widening the gap between the rich and the poor. Hopefully the dividends of this policy will in the long run benefits the common Nigeria people.