Nigeria Adopts Flexible Exchange Rate

For nearly a year now, the central bank of Nigeria has refused Foreign Exchange for importers of some goods into Nigeria. The CBN Governor said importers of such goods which fall into 41 categories were expected to source for their foreign exchange privately.

The excuse of the federal government was that due to the falling oil revenues, Nigeria could no longer afford to import as much as it did in the past. This has led to the huge difference between the official exchange rate of naira to dollar and the parallel market rate. While the official exchange rate of the Naira to a dollar remained at 197 Naira, the parallel market floats between 285 to 347 Naira to a dollar.

Some economists have suggested the devaluation of the Naira to reflect the realities of the foreign exchange market but the government has rejected that call, however the Federal Government maintained that it was not necessary, with President Buhari claiming that the vast majority of the masses will not derive any tangible benefit from a devaluation of the Naira.

Recently, the IMF called on Nigeria to lift the restrictions imposed by the Central Bank and let the Naira reflect the true picture of the “market forces” instead of pegging at an official rate, while market forces (demand and supply of dollar) speak otherwise. This was however also rejected by the President Mohammadu Buhari.

This policy has significantly affected the private sector, who have to source for foreign exchange by themselves in the parallel market

The Central Bank of Nigeria, CBN, however, has finally announced a flexible exchange rate system aimed at making foreign currencies more accessible. This policy was announced by the CBN Governor, Godwin Emefiele who made the disclosure on Tuesday while addressing newsmen shortly after the end of the two day Monetary Policy Committee, MPC, meeting held at the apex bank headquarters in Abuja. A flexible exchange-rate system or floating exchange rate system (unlike the fixed rate system) is a monetary system which allows the exchange rate to be determined by supply and demand of a currency in relation to other currencies.

This decision was made after a long wait, as the Monetary Policy Committee of the Central Bank of Nigeria bowed to the pressures on the nation’s external reserve and foreign exchange, thus, directing its management to switch to a flexible exchange rate policy, with this action, it means there would no longer be a fixed official exchange rate regime of N197/dollar.

By this development, the parallel market would have been suppressed, as one expects the black market to disappear since all you need to do is walk to the bank and ask to buy forex at the market rate

Analysts are however pessimistic about this new policy saying it is unclear how this will work as the CBN will need to put a massive structural operational framework in place to ensure it works perfectly. Also strong regulations will be required around a market that involves everyone with prices that are market determined.

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