Following President Bola Ahmed Tinubu’s promise to unify the multiple foreign exchange rates, the Central Bank of Nigeria (CBN) recently collapsed all exchange rates into the Investors and Exporters (I&E) window. Hitherto, there were four exchange rates: the Inter-Bank FX market, the Investors and Exporters (I&E) window, Bureau De Change window, and the Small and Medium Enterprises (SME) window.
The unification of the exchange rates aligns with the advice of the International Monetary Fund (IMF) and the World Bank. The two global financial institutions had enjoined the government to unify the exchange rates, remove subsidies and increase taxes as part of measures to fix the debt-ridden economy. They also advised the government to raise the benchmark interest rate as a way of curbing the soaring inflation, currently put at 22.4 per cent.
Having a single exchange rate involves floating the naira and allowing market forces to determine the exchange rate. Although some Nigerians have criticised the floating of the naira, others believe that the unification of the Forex market will attract foreign direct investments into the economy.
Consequently, the CBN has directed Deposit Money Banks to remove the rate cap on the naira at the I&E window of the Forex market to allow for a free float of the national currency against major foreign currencies, including the US dollar, British Pound and the Euro.
Under the new arrangement, buyers and sellers of foreign currencies in the official FX market can now quote their own rates in the Forex market, as against the previous practice where the CBN dictated the rates. The new plan allows for flexible rate adjustments that will make the Forex market predictable, equitable, transparent and sustainable.
The unification of the foreign exchange market will boost the economy if it is well implemented. It is hoped that the single exchange rate will not be trailed with the challenges associated with the multiple exchange rates. Latest figures from the Debt Management Office (DMO) show that Nigeria’s public debt has risen to N49trillion, and could reach N81trillion by the end of the year.
With the new exchange rate, the government hopes to streamline the market and reduce distortions. The seamless implementation of the policy will reduce uncertainty, inspire investors’ confidence and minimise arbitrage in forex allocation.
It will also boost the federal government’s revenue by at least N4trillion through additional remittances of exchange rate surplus to the Federation Account, and allow the use of naira cards for limited international transactions. Apart from eliminating the problems associated with the multiple exchange rates, it will provide a level playing field for businesses and other operators in the economy.
So far, the naira has exchanged for N763/$ at the I&E window, showing a depreciation of 0.67 per cent. It has also exchanged at N841/$ before settling at N763/$ at the close of trading. A total of 245.65 million dollars was traded at the official I&W window.
Until now, Nigeria had an exchange rate premium of 61.7 per cent as of March 2023. This has made sustainable growth difficult to realise as parallel market rate is expensive and riddled with corruption.
The unified exchange rate regime will likely deepen the autonomous Forex market through the inflows from export proceeds, Diaspora remittances, multinational oil firms, diplomatic missions and others. However, only adequate supply of the forex will ensure the success of the single exchange rate market.
Let the government shore up the value of the naira by increasing our non-oil exports and local refining of petroleum products. This will increase our external reserves. For less dependence on food imports, there is need to expand our agricultural production capacity.
Meanwhile, the Manufacturers Association of Nigeria (MAN) has raised the alarm that the current scarcity of forex will push them out of business. The government should urgently address the concern raised by MAN.
While the unification of the exchange rate is welcome, the regulations for its success must be put in place. The current scarcity of forex will undermine the objectives of the single exchange rate market of the Tinubu administration. Therefore, the fiscal and monetary authorities should work together to ensure the success of the unified exchange rate regime.
