Floating of naira: Two sides of the debate

 Two weeks ago the Central Bank of Nigeria (CBN) inadvertently re-ignited the debate on floating the naira with a message on its website that no one really knows the motive. The message: “The naira exchange rate is market-determined”, suddenly appeared on the section of the apex bank website that the exchange rate of the naira is normally displayed.The message sparked speculations that the CBN was poised to float the naira. The apex bank promptly denied the allegation.

The message was a dangerous gamble. It could send wrong signals to the parallel market and trigger calamitous hoarding of forex that would plummet the exchange rate of the naira.Stakeholders in the parallel market know that floating the naira would certainly result in massive depreciation in the interim.  Consequently, the parallel market would certainly respond to signs of impending floating of the naira by hoarding forex in a bid to make massive gains. The CBN should therefore guard against a re-play of the speculation that rocked the market two weeks ago.Economy watchers are widely divided on the merits of floating the naira.

Those in support of the policy argue that Nigeria would attract more foreign direct investments if the CBN allows market forces of demand and supply to determine the naira’s exchange rate.They contend that foreign investors are reluctant to bring in their investments at the CBN investors and exporters (I&E) window rate of N360 to the dollar, because the open market value of the naira hovers around N450.Their argument is that if investors bring in $1 million at the I&E window rate, they automatically lose N90 million. The perception is that a market of 201million people is attractive enough to lure foreign investors if the exchange rate of the naira is determined by market forces.

 Perhaps the most plausible argument in support of floating the naira is the claim that the fixed-floating exchange rate policy of the CBN encourages round-tripping of forex from the official window to the parallel market.A source in the parallel market contends that some well wired operators in the parallel market round-trip $500, 000 daily at a margin of N50 per dollar.  That amounts to a princely profit of N25 million daily.Many in this school of thought believe that the attractive business of round-tripping is behind CBN’s resistance to floating of the naira.However, opponents of floating, which include the CBN itself, point to the danger of hyper-inflation as the major disincentive to the policy. This school of thought argues that Nigeria runs a one-handed economy revolving around crude oil export.  Consequently, a floated naira cannot stand the frequent shocks from the international oil market. The naira would suffer irreversible depreciation when oil price tumbles precipitously. They believe that floating the naira would only benefit Nigeria when the economy is sufficiently diversified. The view in that camp is that the exchange rate of the naira could automatically plunge below N500 to the dollar if it is floated. Under the current fixed-floating policy, the apex bank allows the exchange rate of the naira to float within a fixed band. The official rate is not allowed to drop below N310 to the dollar. 

The parallel market rate fluctuates between N360 and N365 to the dollar. The CBN pumps billions of dollars from the country’s foreign reserves into the forex market to defend the naira and keep the exchange rate within the fixed band.Some developments in the Nigerian market lend credence to the argument of the apex bank. Promoters of a popular food supplement bring the product into Nigeria at the exchange rate of N420 to the dollar.  The promoters contend that the official rate is a monstrous caricature of the purchasing power of the naira.  With Nigeria as an import dependent economy, the exchange rate of the naira has a direct relationship with inflation rate. Inflation rate could spin out of control if the floating of the naira fails to attract enough inflow of forex that could keep the market liquid enough to sustain demand.The CBN points to Egypt and Venezuela as bad consequences of pre-mature floating of a currency. Inflation rate in Egypt soared to 30 per cent with the floating of its currency.Venezuela is a worst case scenario. It has a population of just 30 million and pumps 2.4 million barrels of oil per day. With plummeting oil price in 2015, the floating of the Bolivar eventually led to the collapse of the economy. Venezuela inflation now runs at a calamitous rate of 1.8 million per cent.  Shops are empty because the Bolivar is so useless that people now use the currency notes to sow handbags.  No one expects Nigeria’s economy to go the way of Venezuela’s in the event of the naira being floated. Venezuela is a welfare state that provides everything for its citizens. The average Nigerian does not depend on government. He builds his house, generates power, sinks borehole and sometimes builds and maintains the road to his house. Venezuelan government does all that and more for its citizens. Consequently, the economy collapsed when revenue plummeted precipitously.In 2018, Nigerians in the Diaspora remitted $22 billion to the motherland. That is how resilient Nigerians are. But no one should take the resilience of the average Nigerian for granted and gamble with the exchange rate of the naira.        

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