One month after the Nigerian government liberalised the exchange rate on June 14, 2023, the Investors’ and Exporters’ FX (I and E) window recorded over $2.5 billion within one month of 21 trading days. This represents about 58 percent increase over the performance of the market which recorded an average daily turnover of $70 million before the forex reform.
The I and E FX Window is the market trading segment for Investors, Exporters and End-users that allows for FX trades to be made at exchange rates determined based on prevailing market circumstances, thus ensuring efficient and effective price discovery in the Nigerian FX market.
It operated alongside other CBN-controlled windows such as the Invincible and the SME as well as the parallel or black market which maintained a wide gap against the official rate. The liberalization regime witnessed a unification of the I&E window and the black market channel causing a sharp decline in the value of the Naira.
During the one-month period, the volume of dollar supply traded at the I and E window increased significantly. This signals the takeoff of the currency floating regime — a monetary system where the value of a nation’s currency is determined by market forces such as supply and demand.
A look at the performance of the floated exchange regime showed that 21 trading days occurred between Wednesday, June 14 and Friday July 14, when the Naira depreciated lowest at N663.04/$ on June 16 but with the highest daily turnover of $311.82 million.
In contrast, trading on Friday, July 14 showed the highest depreciation of the Naira at N803.90/$, while daily turnover recorded the least amount — $46.90 million. The black market rate was N810/$ which showed a marginal increase from N805/$ exchanged on Thursday.
“Nigeria is not a producing economy; it is import-reliant. We are not earning foreign exchange and our domestic capacity is almost zero. If you are not investing, not producing, not exporting, how do you expect to earn foreign exchange, grow your economy and strengthen your currency? What we are suffering now is the result of many years of waste, corruption and mismanagement. The currency floating system is not a child’s play”, said Justus Akinlade, a financial and investment analyst.
In the floating system, the currency’s exchange rate fluctuates freely in response to various economic factors, including inflation, interest rates, trade balances, and capital flows.
The Naira has depreciated by 70 percent (up to N800/$) against the pre-reform value of N470/$ on the I and E window when it was controlled by a Central Bank of Nigeria (CBN)-determined lid.
Over the years, the Nigerian government has employed various measures to manage the naira, including pegging it to a specific exchange rate, which created two exchange rates, the ‘official’ and the ‘black’ market.
The disparity between the two provided an avenue for people with access to dollars to buy at the official rate and resell at the black market, which created mid-day millionaires across the country. According to experts, many millionaires and a few billionaires were created through this distorted system.
With the floating of the exchange rate, the disparity has been drastically eliminated. But this comes with an inevitable challenge – inflationary pressure. This is because there is a ‘huge quantum’ of money in circulation and the dollar scarcity which has been the core challenge in addressing Nigeria’s many years of forex volatility is now under control.
Reactions to the new forex policy have been mixed. Many believe that it will impose inevitable hardship on the citizens because of the structural effects involved in trying to “correct” the system which will come with little gains because of the culture of waste, corruption and mismanagement.
Others maintain that “by allowing the naira to find its value, the Nigerian government may create an environment conducive to foreign direct investment (FDI), which can spur economic growth, technological advancements, and job creation.
“Now that the Naira has been floated by the Central Bank of Nigeria in response to the directive by Mr. President in his inaugural address, we wish that our experience this time around will be different and that we are able to stay the course.
“I say so because several times in the past, attempts had been made to float the exchange rate in response to the prodding by International Monetary Fund with the appreciation of the sheer difficulties with demand management; but as the consequences begin to unfold, the authorities did not have the political will to persevere and stay the course.
“This is so because nobody wants to be accused of unleashing hardship on the citizens as inflationary pressures pile up. And therefore, like it or not, as the rates fall and the Naira appears to be going into a free fall and the touted benefits are slow at materialising, panic sets in and we beat a retreat and reverse the process,” wrote Dr. Boniface Chizea, a retired banker, top Economics and Business Development Consultant, in a recent opinion article entitled, ‘Nigeria’s Economy and Consequences of Floating the Naira’.
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