Days after President Tinubu spoke about the need to unify Nigeria’s exchange rate, Nigeria’s Central Bank appears to have instituted a managed float .
In a move away from a fixed foreign exchange policy, Nigeria’s Central Bank has loosened control of rates in what appears to be a managed float. TechCabal confirmed from one of Nigeria’s leading banks that the USD is now exchanging for N699 (buy rate) and N700 (sell rate). For years, Nigeria maintained a tightly controlled official exchange rate as the country’s forex reserves hit new lows. While the CBN maintained an artificial rate of $1/N462, most people couldn’t get the greenback at those rates.
To control demand, the CBN created a list of 43 items for which importers could not access FX at official rates. At some point, it also limited FX access for students traveling abroad access. Yet these workarounds didn’t solve the demand problem, forcing individuals and companies to head to the parallel market where prices rose to as much as $1/N755 this year. It created a massive arbitrage opportunity, with the World Bank advising the Central Bank to merge its exchange rate windows on several occasions.
The Buhari administration boasted of improving the exchange rate prices before it was elected, and was reluctant to float the Naira. Instead, it blamed other players for the massive gap between official and black market rates. At its most ridiculous, CBN Governor Godwin Emefiele blamed the rate aggregation site, Aboki Fx and other black-market operators for causing volatility in the FX markets.
But pressure continued to mount as airlines and multinationals demanded USD. In 2021, Unilever told Bloomberg that it was compelled to buy USD 9% above the CBN’s rate, and in March 2023, airlines said they had over $700 million trapped in Nigeria. For foreign investors, it meant that whatever profits they made in Nigeria were paper profits as they could not move their monies. It worsened uncertainty and contributed to dwindling foreign direct investments. Foreign investment in Nigeria reached new lows in Q2 2022.
Will floating the Naira solve FX problems?
While it is a step in the right direction, today’s float may not immediately produce any immediate relief. The backlog of FX demand is huge and it is unlikely that the banks will be able to meet it in the short-term. As the banks will be responsible for sourcing their own FX supply moving forward, it will eventually lead to a unification of the rates.
In theory, the float should precipitate more supply, and in the interim, the CBN will likely intervene and still supply banks with FX whenever necessary. But one thing is clear, investors will appreciate the clarity and reality that comes with today’s managed float.
