The Central Bank of Nigeria (CBN) has authorized banks to sell foreign exchange freely at market-determined rates, aligning with President Bola Tinubu’s commitment to a single exchange rate regime.
This move aims to attract investment and address concerns raised by multilateral lending organizations about the negative impact of multiple currency rates on the economy.
What does floating the naira mean?
Floating the naira means that Nigeria has allowed market forces to determine the exchange rate of its currency.
Previously, the CBN dictated the rates. With the floating exchange rate, buyers and sellers in the official FX market can quote rates they find comfortable.
This move grants more access to the dollar and reduces the need for foreign investors to go through the CBN for currency transactions.
It also allows market economics to come into play, with rates being determined by supply and demand.
The Investors & Exporters (I&E) window now quotes rates ranging from ₦750 to ₦755/$. Some bankers predict the exchange rate may reach ₦800 but eventually stabilize. However, the official market is expected to attract more foreign exchange supply.
Possible next steps to fix the FX market might include prioritizing dollar supply, establishing a hedging mechanism, having attractive market yields, transparency, removing controls, and clearing the dollar backlog.
Expectations are high, and the lifting of capital restrictions is crucial for investor confidence. Harmonizing exchange rates is expected to narrow the spreads between official and parallel market rates.
In all, the floating of the naira is expected to improve trade and bring various benefits to Nigeria’s economy