The Central Bank of Nigeria (CBN) on June 14, 2023 adopted a managed floating exchange rate system with the aim of unifying the multiple exchange rates (FX unification) in the country.
In a newsletter shared on Friday, July 7, 2023, AXA Mansard, a leading insurance company in Nigeria, highlighted how the FX unification allows buyers and sellers of foreign currency in the official foreign exchange (FX) market to determine exchange rates based on their own preferences.
However, the CBN may intervene to regulate the value of the currency. The insurance company started by answering the question:
What is the meaning of a managed floating exchange rate?
“A managed floating exchange rate is a system where the value of a country’s currency is determined by the foreign exchange (FX) market but with frequent intervention from the country’s central bank so as to reduce the level of currency volatility”.
Effects of this policy on the Nigerian economy:
1. Export opportunities:
The depreciation of the Naira resulting from this policy can make Nigerian goods and services relatively cheaper in the global market, potentially increasing export opportunities and leading to increased revenue and job opportunities within Nigeria’s export sector.
2. Foreign Direct Investment (FDI) Inflows:
A weaker currency can make Nigeria more attractive to foreign investors as it lowers the cost of investment. It also allows for easier repatriation of profits. This has the potential to stimulate FDI inflows into Nigeria, bringing in capital, technology, and expertise.
However, other factors such as political stability and the investment climate also play crucial roles in attracting foreign investments.
3. Inflationary pressure:
One immediate effect of this policy is its impact on prices. The depreciation of the Naira can lead to higher prices of imported goods and raw materials, as the cost of importing these items becomes higher in domestic currency terms.
This can potentially increase the cost of living in Nigeria, considering it’s an import-dependent economy.
4. Increase in external debt value:
Nigeria carries a significant amount of external debt. This policy increases the cost of servicing the debt, as the government needs to allocate more Naira to repay these debts.
5. Foreign travel and remittances:
This policy affects Nigerians who travel abroad or receive remittances from family members living abroad, as the amount of foreign currency received in exchange for Naira can vary over time. Therefore, individuals have to closely monitor the exchange rate and determine the optimal time for currency conversion.
The recent implementation of the managed floating exchange rate policy in Nigeria presents both opportunities and challenges. Proper management of this policy is crucial for Nigerians to enjoy its benefits while mitigating its adverse effects on the Nigerian economy.
For investors seeking protection against Naira volatility, AXA Mansard’s Dollar Bond Fund provides an ideal option.
It enables individuals to earn additional income while safeguarding their funds against local currency risks.
[Source: AXA Mansard]
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