Hey my Naija people,
I’m sure we’ve been watching the naira and dollar tussle and we’ve been trying to see who will win.
Over time, dollar has been winning and even recently, the US dollar exchange rate was 1 USD = 1,900 NGN and pounds was 1 GBP = 2250 NGN at black market.
However, based on the current situation of things, it seems Naira no wan gree again oh.
Naira handlers are beginning to take the bull by its horn.
The CBN Governor- Mr Olayemi Cardoso, recently announced some strategies to help naira recover. These includes;
- Ordering banks to sell their excess dollars within 24 hours.
- Implementing a higher exchange rate for Nigerian Custom Service, to discourage imports by making importers pay more tarrifs.
- Ordering International Oil Companies (ICOs) to immediately remit a maximum of 50% of their export proceeds abroad, while the remaining 50% will be remitted after 90 days; as against the former 100% export proceeds ICOs have been remitting immediately to their Parent Companies abroad. This is to control capital flight and acheive currency stability by reducing speculative forex activities in Nigeria.
- Ordering banks to stop cash payments of Personal Travel Allowance (PTA) and Business Travel Allowance (BTA), making banks process all PTAs and BTAs through only electronic transfer; to ensure transparency, reduce the demand and hoarding of cash Foreign-Denominated currencies in Nigeria.
- Removing the International Money Transfer Operators (IMTO) mandate to quote rates within an allowable limit of -2.5 percent to +2.5 percent rate of the previous day closing rate. This will grant IMTOs the flexibility to quote exchange rates for naira based on the prevailing market rates.
- Raising the Monetary Policy Rate (MPR) by 400 basis point from 18.75% to 22.75% in February and raising the MPR by 200 point basis from 22.75% to 24.75% in March, 2024.
- Probing and clearing billions of foreign exchange (FX) backlogs.
- Reinstating the sale of dollars to licensed Bureau De Changes (BDCs) in Nigeria, since the ban of dollar sales in 2021. This is coming after the federal government announced their plan to raise $10 billion to improve liquidity in the foreign exchange market and stabilize naira.The CBN has commenced the selling of $20,000 to each legal BDC operators at the rate of N1,301/$, which is a lower rate compared to the Nigerian Autonomous Foreign Exchange Market (NAFEM) closing rate of N1,582.94. According to Dr Hassan Mahmud, the Director of Trade and Exchange Department, all BDCs are mandated to sell dollars to end-users at a margin not more than 1% above the purchase rate from CBN.
- Setting a limit for BDCs on foreign currency purchase of school fees at $10,000 per student annually. This school fee for international students will be transferred from the BDC’s domiciliary account with a Nigerian bank and paid directly to the foreign school. To ensure transparency of this transaction, the guidelines stated that such transactions must be accompanied by a set of documents: a duly filled out e-Form A, proof of admission or course registration, the educational institution’s bill or invoice, and, for postgraduate studies, a copy of the undergraduate degree certificate or an officially verified statement of results.
As the fight for naira appreciation gets dirty, the Economic and Financial Crimes Commission (EFCC) has raided Bureau De Change (BDCs) Operators in Abuja, who were suspected to have influenced the exchange rate speculation.
Furthermore, the Nigerian Communications Commission (NCC) has ordered Telecommunication companies to block Nigerians from accessing Binance, Coinbase, OctaFX, Kraken, Coinbase and other cryptocurrency websites. This is to avoid continuous speculation, manipulation of the exchange rates and prevent further fall of the naira.
In this post, we’d be exploring the different conversations around the foreign exchange rate as it deals with naira and how you can benefit from this whole naira-dollar saga.
First let’s discuss some major terms we need to understand this post, such as the unified and floating exchange rates.
What is a Unified Exchange Rate?
A unified exchange rate means that since there were formerly two exchange rates in Nigeria, only one single exchange rate will now exist. An exchange rate can either be unified upwards or downwards.
For instance, in June, 2023, the Central Bank of Nigeria unified the exchange rate upwards (from about NGN 755 = 1 USD to about NGN 860 = 1 USD), after which the floating system was adopted.
What is a Floating Exchange Rate?
Floating the foreign exchange rate in Nigeria means that the foreign exchange rate will now be determined by the forces of demand and supply, unlike the previous fixed exchange rate that has been determined by the Central bank of Nigeria and the Federal Ministry of Finance.
THE EFFECTS OF OPERATING A UNIFIED AND FLOATING EXCHANGE RATE IN NIGERIA
1. Only One Exchange Rate Will Exist:
A unified exchange rate means that all businessmen, low income earners, politicians, employees, students and travelers will now have access to all foreign currencies at the same naira cost.
2. The International Transaction Ban on Naira Cards May Be Removed:
Over the years, naira cards have fostered arbitrage transactions. Some Nigerians made profit by buying dollars at a lower CBN rate to sell at a higher rate in the peer to peer foreign exchange market. With the recent development that has provided Nigerians with access to dollars at the same cost, the ban on naira mastercards would most likely be removed soon.
3. A Floating Exchange Rate System Will Encourage Exports And Discourage Imports:
Since the exchange rate of naira to dollar is being determined by the market forces, the more goods Nigeria’s imports, the more naira will devalue and the more goods Nigeria’s exports, the more naira will appreciate in value. This means Nigeria must be a producing and exporting country to achieve naira appreciation.
4. A Floating Exchange Rate System Will Boost The Confidence Of Foreign Investors:
Over the recent years, foreign investors have withdrawn their investments in Nigeria.
However, the managed floating exchange rate system is a more transparent system that attracts foreign direct investment and boosts investors confidence in Nigeria’s economy.
5. Unified Exchange Rate Will Enhance The Availability of Foreign Currencies:
Unlike when we had multiple exchange rates, that foreign currencies were scarce. A unified exchange rate system will reduce the scarcity of foreign currencies, since every Nigerian can access foreign currencies at the same cost. Foreign currencies will now be made available to everyone in banks, fintech companies, and bureau-de-change since there are will be no discrepancies in the cost of buying foreign currencies.
6. An Upward Unified Exchange Rate Will Increase All Foreign-Denominated Government Debts:
Since the exchange rate was unified upwards(from NGN755 to NGN855), there will be an increase in government debts that are denominated in dollars. Foreign debts that were received at a lower exchange rate will now be paid back at the higher unified exchange rate and all the costs incurred in servicing foreign debts will also increase.
7. An Upward Unified Exchange Rate Will Increase All Foreign-Denominated Revenue:
All revenues that are denominated in foreign currencies will increase because the exchange rate was unified upwards. There will be an increase in Government foreign-denominated revenues like grants, excise duties, import and export duties and revenue from foreign investments; when these revenues are converted to naira.
Also, all Nigerians who earn in foreign-denominated currencies (like dollar) will earn more money, when their income is converted to naira.
8. Nigerians Will Incur A Higher Cost on International Transactions And Travel:
This means that since the exchange rate was unified upwards, Nigerians looking to travel for educational purposes, holidays and relocation purposes will incur more travel expenses because most payments are denominated in foreign currencies.
For instance, Students traveling for international studies will spend more naira to get dollars for their tuition fees, proof of funds, travel visa and flight ticket.
Also, other Nigerians making online payments in foreign denominations will incur a higher cost.
HOW NIGERIANS CAN BENEFIT FROM THE UNIFIED AND FLOATING EXCHANGE RATE SYSTEM
The unification and floating of the exchange rate in Nigeria presents new opportunities for Nigerians to benefit from a more transparent and stable financial system.
Below are some major ways Nigerians can take advantage of this development to improve their finances and promote economic activities in the Country;
1. Become A Producer:
By becoming a producer, you have created an income stream for yourself. Nigerians should be Producers that produce surplus goods to feed our nation and ensure we have excess goods for exportation.
By producing goods and services in Nigeria, there will be increased employment opportunities, reduced dependence on imports, increased exportation and better standard of living for Nigerians; which will enhance economic growth.
2. Support Nigerian Producers, Stop Importing Goods:
Supporting Nigerian producers by prioritizing locally-made goods strengthens our economy, fosters job creation, and reduces dependency on imports. By buying Nigerian products, we are contributing to sustainable growth and development, empowering local businesses and protecting the value of our naira. Let us invest in our nation’s future by embracing homegrown products and reducing imports.
3. Become An Exporter Of Products:
The mini and mega exportation market is large. Individuals can single handedly connect with foreigners and export products out of Nigeria to other countries at no operational cost.
Nigerians with large capital can also export goods on a large scale by registering their business name and getting the required licenses for mega exportation. Exportation contributes heavily to Nigeria’s economic growth.
However, our capacity to export goods is heavily dependent on our production capacity in Nigeria.
4. Earn in Foreign-Denominated Currencies:
Nigerians can earn from the multi-trillion dollars cryptocurrency and foreign exchange markets by seeking knowledge in these sectors. The stock market is also another viable market to earn dividends from and earn from capital appreciation of foreign denominated Companies’ shareholdings.
It is however advisable to assess your risk personality before investing in the aforementioned sectors.
As a Nigerian, you can also earn passive income in dollars by investing in mutual funds of banks and fintechs like Piggyvest, Cowrywise, Optimus by Afrinvest. Nigerians can also earn ads revenue in dollars from websites and social media platforms like YouTube, Facebook, Tiltok and Twitter.
5. Get Foreign Investors To Invest In Nigerian Companies:
By attracting foreign Investors to invest in early-stage start-ups and existing companies, the demand for Nigeria’s local currency (naira) will increase and this will result in naira appreciation.
BENEFITS OF OPERATING A UNIFIED AND FLOATING EXCHANGE RATE SYSTEM
1. Price Stability:
A unified and floating exchange rate allows the market forces of supply and demand to determine the value of the currency. This fosters a more realistic and efficient reflection of economic conditions, promoting stability and adaptability.
2. Reduced Speculation:
A unified and floating exchange rate reduces the need for speculative activities, as the market determines the currency’s value, making it less susceptible to manipulation.
3. Improved Management of Foreign Exchange Reserves:
Operating with a floating exchange rate allows for a more efficient management of foreign exchange reserves. The Central Bank can focus on using reserves strategically rather than intervening excessively in the market to defend a fixed rate, which can consume our reserves rapidly.
4. Independent Monetary Policies:
A floating exchange rate provides the Central Bank with greater flexibility to pursue independent monetary policies. This autonomy is crucial for addressing domestic economic challenges without being constrained by fixed exchange rate commitments.
5. Improved Foreign Investment:
Investors find a more transparent and market-driven exchange rate system attractive, fostering increased foreign direct investment and capital inflows. In the last 9 months, the Administration led by President Tinubu has attracted over $30 billion commitments in foreign direct Investments.
Here you go!
You can now take advantage of the benefits that the unified and floating exchange of rate in Nigeria brings.
