Last week, the expression; “The exchange rate of the naira is market-determined” was momentarily displayed in the section of the Central Bank of Nigeria (CBN) website where it used to publish the exchange rate of the naira. That alteration sparked speculations in local and international financial circles that the apex bank was set to float the naira apparently to achieve the illusive single exchange rate. But CBN denied claims that it was poised to float the naira.
The apex bank is currently operating the fixed–floating formula of exchange rate management which allows market forces of demand and supply to determine the exchange rate of the naira within a given band. CBN controls the exchange rate within the set band. That is different from free floating, where market forces determine the exchange rate of the currency without any control by the apex bank.
We commend CBN for moving promptly to quell the speculation and would encourage it to avoid situations that could lead to a replay of the speculation.
We believe that Nigeria cannot afford to float the naira at the moment even as the CBN has been under constant pressure from external and some domestic forces to relinquish control of the exchange rate of the naira and allow it to be determined by market forces.
The argument has been that floating the naira would attract more foreign investment into the economy as the current official rate of the naira is not a true picture of the purchasing power of the Nigerian currency.
Those who argue along that line point to the wide margin between the official, parallel market and some special sector intervention rates of the naira and conclude that foreign investors are reluctant to bring in their investments because the official exchange rate of the naira amounts to short-changing them.
Right now proprietors of a leading food supplement bring the product into Nigeria at the exchange rate of N420 to the dollar rather than the investors and exporters window rate of N360. Many others fix their own rates for doing business with their counterparts in Nigeria.
However, the stance of the proprietors of the popular food supplement is a pointer to what would happen if the naira is floated under current economic circumstances. The official exchange rate of the naira would cross the N400 threshold to the dollar.
In fact many in the international financial circles believe that the exchange rate of the naira at the moment should hover around N440 and N450 to the dollar. Some of the foreign investors who are reluctant to invest in Nigeria are of the view that with Nigeria’s heavy dependence on oil for foreign exchange, a sudden drop in oil price could plunge the exchange rate of the naira to N450 to the dollar and deplete the value of the returns on their investment if they enter the economy at the investors and exporters window rate of N360 to the dollar.
However, with Nigeria as an import dependent economy, floating the naira could plunge the exchange rate below N450 to the dollar, set inflation rate spiraling out of control and price essential items out of the reach of the 157 million Nigerians toiling below poverty line.
Egypt and Venezuela are classic examples of the dangers of floating the currency when the economy cannot sustain it. Egypt ended up with inflation rate sailing perilously close to 35 per cent after floating its currency.
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Venezuela is a worst case scenario. With the drastic drop in oil price in 2015, floating of the Venezuelan Bolivar plunged the exchange rate of the currency below one million to the dollar and priced goods out of the reach of 80 per cent of the populace. The economy consequently collapsed even as Venezuela was pumping 2.4 million barrels of oil per day for a population of just 30 million people. Inflation reached a record 1.8 million per cent.
It is obvious that floating the naira could increase the flow of foreign investment into Nigeria. But it is dangerous when key variables that would stabilise the economy are lacking.
Government has to diversify Nigeria’s economy, build infrastructure, provide security, end policy inconsistency and do a hard fight against corruption before floating the naira. No American or British investor would invest in Nigeria when he/ she knows that he/she has to bribe judges over arbitration.
Insecurity is the greatest threat to investment. Investors who would acquire thousands of hectares of land in Ekiti state to open oil palm plantations cannot go there because herdsmen could kidnap them and demand $10 million dollars as ransom. No foreign investor wants to gamble with life.
Fixing of infrastructure and insecurity are fiscal functions beyond CBN’s monetary policy purview. It is the duty of the federal government to ensure that the key variables that determine foreign investment inflow are in place.
Meanwhile the CBN has no option than to continue with the fixed-floating of the exchange rate of the naira until the authorites on fiscal policy do the needful. Floating the naira at the moment would imply placing the cart before the horse.
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