A Season of Change – Riding the Waves (2)
- The GreenVisor
- Jun 19, 2023
- 3 min read
B. Floating of FX Rate
The Nigerian “Naira” has had multiple exchange rates since its introduction in 1973. This month of June 2023 saw the second time Nigeria has floated its currency in its history. The first float (partial float) happened 20 June 2016, the second time out is 14 June 2023.
Floating of a country’s exchange rate is not synonymous with currency devaluation, but in the case of Nigeria, currency devaluation is effectively what has occurred.
For those new to exchange rates and what they mean, “exchange rate” is the price of one currency expressed in terms of another currency. A country’s exchange rate can be either fixed or floating. A fixed exchange rate means there is one official price, determined by the government or monetary authority of the nation that owns the domestic currency; while a floating rate means that the market – demand and supply – determine the price or value at which the domestic currency is exchanged against foreign currencies.
This affects a nation in a myriad of ways but the key point is that a nation must have something of value it brings to the global market, so that foreign investors are willing to trade or do high volume of business with them, giving their domestic currency “value” in the eyes of its business partners, allowing the domestic currency to trade at a more favourable price or value. The nation must also have a strong economy within itself, such that its own citizens, its own people, are not “willing” to give up their local currency for foreign currencies.
Power of currencies are about trade – who needs which country’s goods or services more, who is willing to trade with which country and what are the terms of these trades. There are other factors, but the spirit is about trade, tradability and the balance of economic power between the traders.
Let’s look at the exchange rate NGN:USD over the past decade i.e., from June 2013 to June 2023, when the exchange rate was most recently floated (onada.com).
Notice anything interesting? First float was in 2016, second float occurred June 2023. Though the value of the naira fell over the intermediate period from a combination of market forces and devaluations by the Central Bank of Nigeria (CBN), the most significant changes are in the float years.
Remember when using your ATM card to pay for items or services from international vendors had a limit of USD 100? Remember when the limit was dropped to USD 10? Remember when you needed a dollar card for such transactions because use of naira cards was completely banned? These happened because the official market rate was so different from the unofficial rates that banks could not confirm the rate at which they would need to buy FX to settle the foreign correspondent banks involved in these trades being made by thousands of customers with international vendors, on a daily basis.
Remember how the use of cryptocurrencies exploded when all these limitations in the banking system got increasingly intense and frustrating for individuals, most especially among the younger generations of Nigerians? More on this in the next post!
Remember how the value of personal travel allowance (PTA) individual travellers from Nigeria could access from banks went from no limitations to USD 4,000 per quarter, then dropped to USD 2,000 and then, just before the floating of the exchange rate, the requirement for applicants of PTA to submit a 3-year tax clearance certificate became the latest addition to the barriers to accessing FX from official channels?
Remember when you needed FX for your business operations and you had to submit your application to the banks weeks in advance and hope that you receive at least part of your request so that you could pay for your foreign currency denominated expenses, business partners, imports, etc., because banks were only given a certain amount of FX from the Central Bank of Nigeria (CBN) during their periodic auctions?
All these can be expected to relax in due course, with the floating of the exchange rate.
What does this mean for us? Well, cost of goods and services may increase, again, but there will come a levelling off of the increases before the end of the year 2023 and we expect to see investor confidence grow in the Nigerian economy, both foreign and domestic investors – all things being equal – leading to improvements in Nigeria’s macroeconomic indices. With good fortune, well planned and well executed policies, this will increase production, trade, service provision (local and exported) across various industries and bring a new normal with improved pricing of local goods and services and easier accessibility to foreign currencies needed for international trade operations.
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