Free Float: Naira Depreciates Further to 702/$
The naira traded at 702.19/dollar at the close of business on Thursday, as the Central Bank of Nigeria has allowed for a free float of the national currency against the dollar and other global currencies.
This means that the currency lost about five per cent of its value within 24 hours from the N664.04/dollar recorded at the close of business on Wednesday.
This came as multiple governmental officials revealed that the Central Bank of Nigeria might begin to supply foreign exchange to the market in the coming days.
Earlier in the week, the CBN had directed Deposit Money Banks to remove the rate cap on the naira at the official Investors’ and Exporters’ Windows of the foreign exchange market.
This came barely two weeks after President Bola Tinubu promised to unify the nation’s multiple exchange rates and less than a week before the suspension and detention of CBN Governor Godwin Emefiele, whose unorthodox monetary policies had become a stumbling block to investors and the economy.
The CBN’s decision to float the currency was hailed by the organised private sector and economists who said the move would unify the country’s multiple exchange rates and bring sanitise the FX market
The development means buyers and sellers of foreign currency in the official FX markets are now allowed to quote rates they find comfortable in the FX market, as against the previous practice where rates were dictated by the Central Bank of Nigeria.
Following the development, the naira has been on a free fall, weakening to 702.19/dollar at the close of trading at the I&E Window on Thursday, according to data from the FMDQ Securities Exchange.
According to the statement, the CBN has collapsed all foreign exchange segments into the I&E window.
It read, “The Central Bank of Nigeria wishes to inform all authorised dealers and the general public of the following immediate changes to operations in the Nigerian Foreign Exchange Market: Abolishment of segmentation. All segments are now collapsed into the Investors and Exporters window. Applications for medicals, school fees, BTA/PTA, and SMEs would continue to be processed through deposit money banks.
“Re-introduction of the ‘Willing Buyer, Willing Seller’ model at the I&E Window. Operations in this window shall be guided by the extant circular on the establishment of the window, dated 21 April 2017 and referenced FMD/DlR/ClR/GEN/08/007. All eligible transactions are permitted to access foreign exchange at this window.
Meanwhile, at the parallel market on Thursday, the naira closed flat at 757/dollar, according to currency dealers in Kano, Abuja and Lagos.
Experts react
Speaking on NewsNight on Arise News, the Policy analyst, Sam Amadi, admitted that while there are some benefits to this move, there are also some downsides.
“When you allow the free market to determine the rate, you are going to have devaluation. It is good for you if that means investors would want to grab your assets.
“But the danger to watch out for is that if devaluation happens in an unregulated manner, it could lead to a loss of value. Assets lose value, and the pressure of devaluation can lead to further devaluation,” he said.
Amadi further noted that the move will likely help manufacturers get access to foreign exchange easily but there is the downside of currency volatility.
Also speaking on Global Business Report on Arise News on Thursday, Director-General, Manufacturers Association of Nigeria, Mr Segun Ajayi-Kadir, said the move has pros and cons.
He said that the advantages include market efficiency and more capital inflow and export market penetration.
CPPE applauds unification of exchange rate
He said, “What has happened is in line with what we had anticipated that there will be some measure of unification.
“We believe that it is going to create efficiency in the market, lead to capital inflow and give us market penetration as it will improve participation in the export market.”
On the downside, he said that the move might make imports more expensive, and this extra cost would likely be passed on to the consumers.
Ajayi-Kadir said, “It is going to make our import more expensive, and the cost will also be transferred to the final consumer. So, there are pros and cons, but on the balance, we see it as a positive development”
The CEO of the Centre for the Promotion of Private Enterprise, Dr Muda Yusuf, stressed the need for the CBN to ensure market stability, especially in the event of too much volatility.
He said, “The CBN still has a role to play in stabilising the market… If the situation is degenerating such that we have too much volatility, or the currency is losing too much strength, the CBN has a responsibility to intervene.”
A Partner and Chief Economist at KPMG Nigeria, Yemi Kale, in a report, said the federal government’s decision to remove petrol subsidy and unify the country’s exchange rate would result in a spike in the rate of inflation for June and July 2023, as an immediate consequence of both policies.
He estimated that with a uniform exchange rate, the FX rate will range N650-750 per dollar in the near term and relative equilibrium will depend on how quickly supporting policies are introduced that ensure and support FX supply.
“By taking this bold yet risky decision, however, the gap in the official and parallel markets will likely narrow overtime, thereby eroding the FX gap and the opportunities for roundtripping as the arbitrage opportunity reduces; Furthermore, this will overtime encourage capital inflows from FPI, FDI and deepen the forward’s market,” he said.
“Other unintended consequences include worsening debt burden, debt to GDP and debt service ratios may worsen compared to immediate post-PMS subsidy levels unless measures are urgently taken to boost revenue and further manage government expenditure.”
He, however, said that the long-term results will be better for the economy regardless of the anticipated short-term difficulties.
Kale said these decisions have inspired domestic and international confidence in the Nigerian economic environment and will likely support an imminent sovereign ratings upgrade.
He recommended that to sustain the positive momentum and atmosphere of cautious optimism currently being witnessed, it is important that clarity, especially relating to the remaining FX and monetary policy supporting structures, are established.
“This includes the role of the CBN as primary FX supplier and for FX supply to be properly decentralised; Furthermore, it is important government communicates and introduces erstwhile promised inflation support post-PMS subsidy removal to minimise disruptions in consumer demand and business earnings,” he said.
Analysts at Parthian Securities Limited, in a report on ‘The liberation of the N/US$ exchange rate’ anticipated that the liberalisation of FX rates would create an incentive for banks, in their own capacity, to support trade and offer facilities to credible businesses with FX needs.
The analysts said the black market was likely to be the worst hit by this decision as margins were thin and more transactions were directed towards commercial banks.
On the impact on retail investors, it said, “The cost of US dollar obligations would increase; that is, payment for service transactions like foreign tuition, training courses, medical bills and online applications would be higher.
“The cost of importation and imported items such as cars, electronics and imported food would be higher which might lead to higher inflation.”
