The Nigerian economy has long grappled with the issue of currency stability and exchange rates. Recently, there has been considerable debate and speculation about the possibility of floating the Naira, which would involve allowing market forces to determine its value against other currencies, rather than relying on a fixed exchange rate.
In this blog post, we will delve into the potential implications of floating the Naira and explore how it may affect individuals and various sectors of the Nigerian economy.
WHAT IT MEANS TO FREE FLOAT THE NAIRA
“Free floating the Naira” refers to a situation where the exchange rate of a Nigeria’s currency, the Nigerian Naira in this case, is determined solely by market forces of supply and demand without any intervention from the central bank or government. It will be based on ‘willing buyer and willing seller’ situation.
Typically, central banks can adopt different exchange rate regimes to manage their currency’s value. These regimes range from fixed exchange rates, where the central bank pegs the currency’s value to another currency or a basket of currencies, to managed or floating exchange rates, where the central bank intervenes in the foreign exchange market to influence the currency’s value.
When a currency is “free floating,” its value is determined by market forces. Supply and demand dynamics in the foreign exchange market, along with other economic factors, influence the exchange rate. The central bank does not intervene to control or stabilize the currency’s value. Instead, the exchange rate fluctuates based on market conditions and investor sentiment.
So, now that the Central Bank of Nigeria (CBN) has free floated the Naira, its value would be determined by factors such as interest rates, inflation, economic indicators, capital flows, and market expectations. The exchange rate would fluctuate in response to these factors, potentially leading to changes in Naira’s value relative to other currencies.
The decision to free float a currency is often driven by a country’s economic and monetary policy objectives. It can provide greater flexibility for the currency’s value to adjust based on market conditions, which may help improve competitiveness in international trade and attract foreign investment. However, it also exposes the currency to greater volatility and potential fluctuations, which can have both positive and negative effects on the economy.
WHAT ARE THE EFFECTS OF A FREE FLOATED NAIRA?
The effects in the short run might rather be harsh for the average Nigerian, but however, the government is forecasting a greater economic good for the nation in the long run. Here are the effects of this new monetary policy:
Exchange Rate Volatility:
One of the most immediate impacts of floating the Naira is the likelihood of increased exchange rate volatility. With a floating exchange rate, the value of the Naira will fluctuate in response to market forces such as supply and demand. This volatility can have both positive and negative effects on different segments of society.
Importers and Exporters:
Floating the Naira will significantly impact importers and exporters. Importers will face higher costs as the value of the Naira declines, making imported goods more expensive. Conversely, exporters may benefit from a weaker currency, as it boosts the competitiveness of their products in foreign markets.
Inflation and Consumer Prices:
A floating Naira will have implications for inflation and consumer prices. If the Naira depreciates rapidly, the cost of imported goods and raw materials will rise, leading to inflationary pressures. This, in turn, can erode the purchasing power of consumers and increase the overall cost of living.
Investors and Foreign Direct Investment (FDI):
The decision to float the Naira will have a significant impact on investors and foreign direct investment (FDI) in Nigeria. A floating currency regime allows investors to accurately assess the risk associated with their investments. However, increased exchange rate volatility may discourage foreign investors, as it introduces uncertainty and makes long-term financial planning more challenging. However, as forecasted by the monetary authorities, the volatility won’t won’t be high enough to discourage the flow of FDI into the country. Infact, Nigeria is expecting increased FDI as a result of this policy.
Nigeria is heavily dependent on remittances from its diaspora. Floating the Naira may affect the value of remittances, as fluctuations in the exchange rate can lead to unpredictable amounts in local currency for recipients. This volatility could have implications for the well-being of families relying on remittances for their livelihoods.
Tourism and the Service Sector:
A floating Naira will influence the tourism and service sectors in Nigeria. A weaker currency may make the country more attractive to international tourists, as their spending power increases. Additionally, the service sector, such as hospitality and travel agencies, may benefit from increased foreign currency inflows. However, this advantage may be offset by inflationary pressures and increased costs of imported goods and services.
The floating of the Naira holds the potential to bring both advantages and challenges to various sectors of the Nigerian economy and individuals including you and I. While a floating exchange rate will lead to increased exchange rate volatility, it will also enables market forces to play a more significant role in determining the value of the Naira. The impact on importers, exporters, investors, consumers, and the service sector will depend on the effectiveness of economic policies, the resilience of the economy, and the ability to manage inflationary pressures. Haven considered this significant shift in monetary policy, it is crucial for policymakers in Nigeria to carefully assess the potential benefits and risks, and implement measures to mitigate the adverse effects while maximizing the advantages of a floating Naira.
For individuals, my take home question for you is, how do you intend capitalizing on this monetary policy shift to expand your earning capacity?
Hit the comments box below let’s learn from you.