[JUST IN] CBN Floats Exchange Rate: What are the Implications?

The Nigerian Naira has recently undergone a significant devaluation, with the currency trading at N750-N755 per dollar at the investors and exporters (I&E) window.

This devaluation is a result of the Central Bank of Nigeria’s (CBN) directive to commercial banks, Wednesday, allowing them to freely sell foreign exchange (forex) at market-determined rates. This move signifies the adoption of a free-floating or flexible exchange rate regime.

Under this policy, the CBN grants banks the permission to sell dollars at any rate, effectively removing or relaxing the restrictions on the currency’s exchange rate.

Earlier, after the inauguration of President Bola Tinubu, a media outlet reported that the Naira had been devalued to N631 per dollar from N461.6, highlighting the recent volatility in the currency’s value. However, the CBN issued a statement refuting these reports.

The devaluation aligns with President Bola Ahmed Tinubu’s announcement of the government’s intention to unify the country’s exchange rate in order to stimulate economic growth.

Implications

According to analysts, the exchange rate of the Naira will now be determined by the forces of supply and demand in the foreign exchange market. This means that banks will have the freedom to set their own exchange rates based on market conditions and competition.

However, there is a possibility of increased volatility resulting from fluctuations in supply and demand, as well as market sentiment and economic factors. These fluctuations can cause the exchange rate to rapidly fluctuate, impacting businesses, investors, and consumers involved in international trade or holding foreign currency assets.

A freely floating exchange rate can also affect a country’s balance of trade. If the currency depreciates significantly, it can make exports cheaper and more competitive, potentially benefiting the country’s export sector. Conversely, it can make imports more expensive, leading to higher costs for imported goods and inflationary pressures.

Furthermore, this policy change may attract speculative capital flows. Investors may engage in currency speculation, seeking to profit from short-term fluctuations in exchange rates. This can introduce additional volatility to the foreign exchange market.