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Floating the Naira: Embracing liquidity

Nigeria, like many countries, is faced with the challenge of steering its economic ship through the unpredictable waters of global markets. Floating the naira is one of the bold moves the present administration has taken to strengthen the economy and improve global competitiveness.

On June 14, 2023, the Central Bank of Nigeria (CBN) issued a directive instructing deposit money banks (DMBs) to remove the rate cap on the Nigerian naira within the Investors’ and Exporters’ (I&E) window of the foreign exchange market. The objective is to establish a free-floating system for the national currency, allowing it the flexibility to vary independently against the United States dollar and other significant global currencies.

Experts have quickly lined up on opposite sides of the aisle.

Some say that this would allow the currency to adapt to changing economic conditions, making the country more competitive, repairing trade imbalances, attracting foreign investment, and responding to changes in global markets. Others say that it would cause the exchange rate to become more volatile, which could have both positive and negative effects on the economy.

Information on the website of CBN showed that as of Friday, November 16, 2023, dollars were exchanged for N840 at the I&E window.

implications and potential consequences for the economy

Adopting a floating exchange rate system, where the exchange rate is determined by market forces rather than a fixed government rate, will help Nigeria gain significant advantage that can greatly impact her economic landscape.

One of the main benefits of a floating exchange rate system is its ability to reflect the true value of a currency based on market dynamics. This creates a more realistic and responsive economic environment, allowing the naira to find equilibrium in the global market.

Allowing market forces to influence the exchange rate puts Nigeria in a better position to attract foreign investments and improve its trade balance.

Floating the Naira also serves as a safeguard against external economic shocks.

In an interconnected global economy, having the ability to adjust the currency’s value in response to changing economic conditions is crucial.

A flexible exchange rate system enables Nigeria to absorb external shocks, such as fluctuations in commodity prices or changes in global interest rates, without resorting to drastic measures that could harm the domestic economy.

A floating exchange rate also improves the effectiveness of monetary policy. With the ability to adjust interest rates and implement monetary measures in response to domestic economic conditions, the Central Bank can exert greater control over inflation and unemployment. This creates an environment favourable to long-term economic growth.

When the exchange rate is determined by market forces, speculative activity and artificial distortions are reduced, resulting in a fair and competitive environment. This transparency inspires trust in both domestic and foreign investors, encouraging increased participation in the Nigerian market.

Furthermore, a floating exchange rate regime encourages fiscal discipline. Allowing the market to determine the value of the naira forces the government to implement responsible fiscal policies that contribute to the overall health of the economy. This may include measures to control inflation, reduce budget deficits, and promote long-term economic development.

Risks of increased volatility, inflationary pressures, vulnerability to speculation

While floating the naira promises flexibility and adaptability, the risks of increased volatility, inflationary pressures, vulnerability to speculation, and challenges to fiscal discipline must not be overlooked. It is critical to strike a balance between economic dynamism and stability.

It is important to note that such a transition requires careful monitoring and effective policy implementation. Adequate measures must be in place to mitigate short-term disruptions, and institutions responsible for monetary and fiscal policies must collaborate to ensure a smooth and successful transition.

Emphasis must be placed on Nigerian-made goods. Now is the time to purchase locally manufactured cars, and the lawmakers must set an example with this. When the government places a premium on indigenous goods and everything Nigerian, she becomes an exporting country, and the value of the naira soars.

Embracing this dynamic exchange rate system has the potential to unlock new avenues for economic growth, attract foreign investments, and position Nigeria as a competitive player on the global stage.

Writing by Oluwaseyi Ajibade; Editing by Annabel Nwachukwu