Central Bank of Nigeria Embraces Currency Floating as Naira Weakens: A Step Towards Economic Transformation
In a significant move towards economic reform, the Central Bank of Nigeria (CBN) has announced the removal of the rate cap on the naira at the official Investors and Exporters’ Window of the foreign exchange market. This decision aims to allow for a free float of the national currency against the dollar and other global currencies. The CBN’s decision has garnered support from the private sector and economists, who believe that the currency float will unify exchange rates and bring stability to the FX market. However, the naira has experienced a depreciation to N664/$ as a result of this new development.
Unification of Exchange Rates:
The CBN’s directive to remove the rate cap signifies a departure from the previous practice of dictating exchange rates. The floating of the currency allows buyers and sellers of foreign currency in the official FX market to quote rates based on their preferences, fostering a more open and flexible market. The move towards a unified exchange rate system is expected to bring clarity and transparency to the foreign exchange market, eliminating multiple forex windows and streamlining operations. Previously, the naira had consistently closed below N480/$ at the Investors and Exporters’ Window.
Implications on the Naira’s Value:
Following the announcement, the naira witnessed a decline in value, reaching N664.04/$ at the close of trading at the I&E Window. This marks a significant 40.97% decrease compared to the previous day’s rate of 471/$. The depreciation reflects the market’s reaction to the newfound freedom in quoting exchange rates. However, it is worth noting that the CBN had yet to update the I&E Window rate on its website at the time of the report.
CBN’s Operational Changes:
The CBN, through its Director of Financial Markets, Dr. Angela Sere-Ejembi, confirmed several operational changes to the foreign exchange market. These changes include collapsing all foreign exchange segments into the Investors and Exporters’ Window, reintroducing the ‘Willing Buyer, Willing Seller’ model, and implementing an order-based two-way quote system. The CBN has also ended the RT200 rebate scheme and the Naira4Dollar remittance scheme. The operational hours for trades in the forex market have been set from 9 am to 4 pm, Nigeria time.
Reactions and Expectations:
The decision to float the naira has received mixed reactions from various stakeholders. Some experts and economists commend the move, stating that it will attract international investors and enhance economic performance. They believe that a market-determined exchange rate fosters transparency and eliminates distortions. However, others express concerns about the need for CBN intervention to stabilize the exchange rate within a certain range and prevent excessive volatility.
The private sector, represented by organizations such as the Nigeria Economic Summit Group and the Nigerian Association of Chambers of Commerce, Industry, Mines, and Agriculture, generally supports the currency float. They highlight the benefits of unifying exchange rates, including increased investments, job creation, and enhanced confidence of investors. The move is seen as a necessary step towards economic transformation, despite the initial challenges associated with currency depreciation.
The Central Bank of Nigeria’s decision to float the naira represents a bold move towards economic reform and unifying exchange rates. While the currency depreciation following the announcement presents short-term challenges, many experts believe that the long-term benefits will outweigh the initial adjustments. The currency float is expected to bring transparency, attract foreign investment, and foster economic growth. As the CBN continues to navigate this new path, periodic interventions may be necessary to stabilize the exchange rate and ensure a favorable environment for sustainable economic development.