Nigeria has taken the significant step of officially floating its national currency, the naira, marking a departure from its longstanding fixed exchange rate system that deterred investors and led to a scarcity of foreign currency in the economy.
Sources familiar with the matter confirmed on Wednesday that banks are now quoting a market rate for the naira based on willing buyers and sellers. Several customers have reported receiving emails from their banks indicating this change.
The Investors & Exporters (I&E) window currently shows a trading range of N750 to N755 per dollar, according to customers who shared details from their bank emails. However, the Central Bank of Nigeria (CBN) still lists the I&E rate as N463/$ on its website, with the last update made on June 9.
This latest development by the CBN follows the suspension of CBN Governor Godwin Emefiele by President Bola Tinubu. Emefiele’s unconventional monetary policies had posed challenges to investors and the overall economy.
Bankers suggest that the exchange rate could rise as high as N800 to N1000 by the end of the day. They emphasize that the CBN’s next crucial step should be prioritizing the supply of dollars to support the floating naira.
“The convergence of rates is only the first step; the next step is the most crucial, which is to increase the supply in the market,” a source explained.
The adoption of the willing buyer/willing seller arrangement is seen as just the initial stage in a comprehensive plan to address Nigeria’s ailing foreign exchange market. Experts propose a six-step approach, with the second step being the implementation of a hedge mechanism priced in line with the market. The third step would involve ensuring attractive market yields for Foreign Portfolio Investors (FPIs).
Subsequent steps would focus on enhancing transparency, eliminating controls on domiciliary accounts, and resolving the dollar backlog in the market to attract FPIs.
“The primary focus is on supply,” the source emphasized.
Expectations are high following the initial measures taken to restore stability to Nigeria’s foreign exchange market. Chidi Uzo, a fund manager at Stanbic IBTC Pension Managers Ltd, described the move as a “bold step in the right direction.”
Uzo added, “However, it should be accompanied by the removal of capital restrictions for investors awaiting the repatriation of their funds. The extent to which capital flows are allowed to move freely will significantly influence foreign investor participation.”
He further expressed optimism that the harmonization of Nigeria’s multiple exchange rates through market-driven valuation of the naira would promptly narrow the widening spreads observed over several years between the official and parallel market exchange rates.
