Since the CBN’s official announcement of the FX unification, several financial experts, economists, trade experts, and others have taken to different platforms to air their opinions on the subject. What is really common among these opinions is that they all have financial sustainability at heart.
The highlight of the CBN’s memo was the apex bank’s decision to liberalize the market “in terms of who can sell and who can buy. Recall that President Bola Tinubu promised to change the country’s monetary policy, restoring it to its former position as the continent’s top investment location.
In its letter, the CBN instructed banks that, with the exception of a maximum N1 bid-ask difference between the buy and sell rates, they could purchase foreign exchange from any source at any rate and sell it at any rate. The Investors and Exporters (I&E) rate, which is N750-N755/$, is presently the price at which banks can buy and sell foreign currency.
In order to provide efficient and effective price discovery in the Nigerian FX market, the Investors’ and Exporters’ FX Window is the market trading section for investors and exporters. It enables FX deals to be made at exchange rates decided based on current market conditions.
While the CBN’s unification decision comes at a time when Nigeria is in dire need of a monetary solution, the ripple impact of the decision must be assessed by all segments of the economy.
Liberalization
The CBN’s FX unification means that official and unofficial bodies could buy on the interbank market from anybody without seeking Central Bank approval.
There was a restriction on who could buy, though. The CBN states that only qualified transactions are allowed to sell foreign currency.
The CBN forbade importers from using the FX market to obtain currency for the purchase of 41 products in the middle of 2015. The list of items, which included some inputs for production, only gave broad descriptions.
Export
The CBN’s move to impose restrictions on eligible transactions is a subtly revealed signal of the central bank’s motivation to increase Nigerian exports relative to imports.
A country must harness sufficient resources for the creation of goods and services, as well as consume and export some completed goods and raw materials that cannot be produced domestically, in order to develop and raise the standard of living of its people. More Nigerians are urged to export at the current rate.
Large amounts of Nigerian exports during the 1960s and 1970s were controlled by the agriculture industry, which was a significant source of foreign income.
In March 2023, Nigeria reported a trade surplus of NGN 908.5 billion, compared to a deficit of NGN 617.1 billion in the same month the previous year. Imports decreased by 59.8% from the previous year to NGN 1,376 billion, mostly as a result of fewer purchases of other oil products (down 89.4%), manufactured goods (down 27.6%), and raw materials (down 10.7%).
As a result of steep drops in shipments of manufactured goods (-59%), energy (-73%), raw materials (-59.1%), and crude oil (-17.2%), exports declined at a slower rate of 18.7% to NGN 2,285 billion, more than offsetting gains in shipments of agricultural goods (21.9%).
The optimum moment to advocate for higher exports to raise Nigeria’s trade surplus is definitely right now.
Capital
As foreign exchange would be traded at a favorable rate under a single exchange rate, the government’s revenue from the sale of FX would rise. The foreign exchange market has more liquidity and is less uncertain under a single exchange rate regime.
The CBN would provide more exchange rate surpluses to the federation account, increasing government revenue and naira cards may be used for some overseas transactions.
In the short to medium term, it would make it easier to clean up the economy’s naira liquidity. The future outlook for inflation would improve as a result of this.
Debt
The government’s debt in naira terms will significantly increase as a result of the CBN’s FX unification. The parallel exchange rate in Nigeria is detrimental, according to David Malpass, President of the World Bank Group, as it affects upcoming debt service obligations and raises the possibility of debt distress.
Taiwo Oyedele a Fiscal Policy Partner and Africa Tax Leader at PwC highlighted that the debt ranged from N12 trillion to N90 trillion in Naira terms. He added that the ratio of debt to gross domestic product would rise by 5%.
Due to the aforementioned, the debt to GDP ratio will rise by roughly 5%, the cost of debt service for foreign debt will rise in line with it, and the government’s revenue will rise in naira terms, resulting in a higher tax/revenue to GDP ratio.
Crypto Trading
The value of cryptocurrencies and the USD are inversely correlated. The outperformance of the dollar is bad for cryptocurrencies because most Bitcoin trades are against the USD.
Due to the unification, P2P trades in Nigeria must be conducted using the prevailing USD exchange rate.
Larry Frank, a blockchain expert, noted that said: bitcoin price has always been determined by the black market rate, so since the black market rate didn’t change, we are good for now.”
As a trader, it is vital to be aware of how movements in the dollar can impact your holdings.
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