NAIRA AND THE FLOATING REGIME.
This week begins with a new order in our currency regime. Before now $1=N197 (Fix Rate). Naira was fixed at official market by CBN due to poor competitive power of the currency.
As a result, we lost over N3 trillion in stocks, unemployment grew to 12.1 while underemployment stood at 9.5 of the working population of only (64 million Nigerians). Parallel market (BDCs) operators maximized the exchange rate gap between the fixed rate and the perceived official rate. The operators sold the dollar at N400 in Febuary 2016. Speculative activities by some individuals ended in the sales of dollars to the BDCs. Official window was only accessible by a few importer based on class of commodity. This created demand surge for the parallel market. Prices were I create almost every week.
Many analysts and Economists consequently called for devaluation the naira or floating rate. On the 21st June,2016; CBN bowed to pressure with introduction of the floating rate. However, in four hours $1=N281. Two days after, Naira futher fell to 284 to a dollar. Today, Naira is N281 to a dollar.
I see people celebrate this policy. Well, in my opinion this policy will successfully fix effect of economic downturn but not the real issues.
What is floating exchange rate? A floating exchange rate is a regime where the currency price is set by the forex market based on supply and demand compared with other currencies. This is in contrast to a fixed exchange rate, in which the government entirely or predominantly determines the rate.
Any economy that does not have much to supply will suffer especially if such is a market for the rest of the world. I think Nigeria is for for this picture. Why Naira may be at a disadvantage is clear- we consume what we don’t produce and produce what we don’t consume. 85 per cent of all our consumption are all imported while we only produced crude oil. Too bad we don’t even refine enough quantity at home. As a result, we will keep importing since we have not changed the fundamentals. Thus, naira will fall even if it is substly overtime.
What must we do to solve this problem? We must make policies to support agriculture, SMEs, ICT, innovation etc. We must carefully adopt import subsistution policy to reduce foreign consumption. Thus reduce pressure on our dollar demand while Naira demand may remain steady.
On supply-side, oil price as fallen while avengers’ activities in Niger Delta have reduced production. Clearly, political solution was not sustainable in Niger Delta. Similarly, money solution in amnesty is not also sustainable. What Nigeria must agree regarding Niger Delta is the development of the region is of the essence. Without developing Niger Delta, other solution may only be temporal.
Economist | Finance&Investment Coach | Economy&Business Professional | Developing Lives&Economies |