Will Tinubu’s Monetary Policy Revive The Naira Or Is This Another Case Of Flogging A Dead Horse

Days after his swearing in as Nigeria’s 16th leader, President Bola Ahmed Tinubu lived up to his promise to carry out monetary policy reforms and ensure a single exchange rate in Nigeria.

In line with the policy, the Central Bank of Nigeria (CBN) adopted a clean float foreign exchange management, a possibility it foreclosed for years.

Speaking via a press statement signed by its director in charge of financial markets, Angela Sere-Ejembi, the apex bank announced immediate changes to operations in the Nigerian Foreign Exchange (FX) market.

“All segments are now collapsed into the Investors and Exporters (I&E) window. Applications for medicals, school fees, BTA/PTA, and SMEs would continue to be processed through deposit money banks,” Dr Sere-Ejembi said in a message to authorised dealers of forex.

Naija News reports that there have been different reactions to this policy.

Some individuals have praised the president for making the move, while others have insisted that floating the naira in an underdeveloped country might pose serious problems for the economy.

First of all, let’s take a look at what this policy means, and how it affects the average Nigerian. If it will indeed revive the naira and save it from its constant free fall.

Let’s begin from the basis.

What Is Exchange Rate?

An exchange rate is the value of a country’s currency in comparison to another.

There are two types of exchange rates, Floating exchange rates and Fixed exchange rates.

The fixed exchange rate is determined by the government and central bank of a country.

In Nigeria’s case, it is determined by CBN rates, bank rates, BDC rates and the black market rate.

However, in a bid to unify the exchange rate, the government decided to adopt the floating exchange rate, subsequently, collapsing it into the Investors and Exporters (I&E) window.

Floating exchange rate changes according to supply and demand.

This means that if the demand for a currency is low then its value will also fall, making imports more expensive. Alternatively, if demand for a particular currency is high, then its value will increase.

The supply and demand of a currency can be impacted in various ways including interest rates, inflation, and foreign investment.

All of these will have a big impact on the value of a currency. For example, if a country receives a lot of foreign investment from abroad, then the demand for its currency will increase and result in a rise in value. This is why a floating exchange rate is likely to fluctuate all of the time, as there are lots of different factors in play that can impact how an exchange rate is performing.

Now that we have gained a certain level of understanding of what free floating is, let us take a walk down memory lane to 2016 when the government decided to free-float the naira

What Happened In 2016 When Nigeria Floated The Naira

In May 2016, the then CBN governor, Godwin Emefiele, announced during a press conference that the government had decided to float the naira. At that time, the dollar was exchanged for ₦199/$1 on the official market.

Emefiele had stated that while there might be a free float, the government will retain the official rate for “critical transactions”.

In June 20, 2016, the float became official. The naira tumbled to ₦280/$1 just one day after.

The black market responded favourably, moving from ₦347/$1 to ₦337/$1. The CBN was optimistic that official and black markets would merge and the naira would settle around ₦250/$1.

The then CBN spokesman, Isaac Okorafor told journalists that the bank is determined to intervene regularly according to the dynamics of the market, adding that the market would begin to evolve steadily as more money comes into the market.

However, the naira went up ₦300/$1, and contrary to expectations, the black market did not merge with interbank rates. The naira had reached an all-time low of ₦525/$1.

What Went Wrong?

In 2016, the naira float policy did not meet a ready and able market that Nigerians could swoop in, our production level was low.

According to the CBN spokesman, “We are 180 million people, our infrastructure is so poor and the productive capacity cannot be fast enough to rise to benefit from massive depreciation. If you float the Naira today, and given recent discoveries by security agencies, you’ll discover that our case will be terrible. Egypt today has an inflation rate of almost 31%, and Angola also has about 36% inflation, ours is at 17.26%.”

He explained that if Nigeria floats the naira, it allows speculators, those with corrupt money, and people who create bubbles in the economy to launch into the market.

In the long run, the CBN had to step in and intervene, hence the end of the free float policy.

What is The Difference Between The 2016 And The 2023 Economy.

Just like 2016, Nigeria is still dependent on importation, and remains a consuming economy instead of a producing one.

The only difference is that Federal Government no longer subsidies the price of petrol, hence it does not need to control the price.

When the Federal Government controlled the price of fuel, the price goes up if the naira value falls. Unlike now, in 2016 when Nigeria’s government still dealt with fuel subsidies, setting a floating currency while controlling petrol prices would eventually cause problems.

Corruption is still very rampant. Bad actors, speculators, and corruption in high and low places are still rampant in Nigeria.

What Do Operators In The Financial Industry Think

Speaking in an exclusive interview with Naija News, the CFO of Raven Bank, Chidinma Blessing Maduewesi, explained extensively what the policy means for the economy and if there are any chances that the situation in 2016 would not repeat itself.

She said, “The intention of the CBN is to unify the official USD exchange rate and the black market rate, and allow the forces of demand and supply determine a new and uniform rate for the Naira to Dollar. This market determined rate, as against the fixed CBN could potentially sanitise the FX market of arbitrage gainers, speculators, and encourage easy entry of investors and foreign capital into the Nigerian Market.

“However, there are other factors to be considered as this is not the first time a floating exchange rate has been attempted. In 2016 a partial float of the Naira was tried and it failed, as the CBN had to step in at some point.

“It is important to note that the floating exchange rate policy is significantly dependent on a sufficient and steady supply of foreign currency to the FX market. This supply should be more than enough to meet the demand in the market, thereby forcing the black market rate downwards to create a new merged rate.

“Unsurprisingly, the elements that can frustrate the achievement of a unified rate and ultimately a valuable Naira are not new to us. These fundamental economic issues have persisted and clamoured for attention for a very long time.

“Import Dependence: Nigeria’s economy is still heavily dependent on imports. A stable export base is a fundamental parameter that would have given necessary support to the success of this policy in Nigeria, if it existed.

“As of 19 June 2023, the I&E Window opened at NGN712.50/$1, and the Naira is trading at NGN759/$1 in the black market. It appears the official rate is bending over backwards from the NGN461.92/$1 it was trading on 1 June 2023. What are the chances that the CBN will not attempt to intervene again to guide FX pricing as it did in 2016?

“Capital Inflow the expected flow is that with a unified rate, investors will troop into the Nigerian market with fresh capital ready to explore investment opportunities. As appealing as it may look, they are also aware that the country just welcomed a new administration, that is still introducing new policies that might distort market variables for a time – like the removal of fuel subsidy which has caused inflation to rise to 22.41%. A lot of investors might choose to hold off until the market stabilises, thereby affecting our already lean supply of FX.

“Other elements that need to be considered are the conditions that caused the failure of the 2016 FX float policy. It is clear that if the CBN hopes to achieve a more valuable Naira, they have to go beyond unifying rates and solve the fundamental flaws in the economy causing FX scarcity.”

A former Managing Director, H.J. Trust and Investment, Harrison Owoh, while reacting to the policy stated that it might be commendable in a developed country where all structures are already in place but it is bad for a developing economy like Nigeria.

Owoh noted that Nigeria is an import-dependent economy, hence there will be high inflation and the cost of goods and services including cost of doing business in Nigeria will increase.

Conclusion

What have we learnt from this article?

• Introducing the free floating policy is not a guaranteed option in reviving the naira, it is a two-edged sword.
• Nigeria remains an import-dependent economy and this would serve as a hindrance in feeding the value of the naira.
• Investors might not trust Nigeria’s economy just yet to begin trooping in.
• Corruption is still at its peak.