On June 14th, 2023, Nigeria made an official announcement to unify all sections of the foreign exchange into a single system. This new exchange rate policy collapsed the multiple exchange options, including the official rate, parallel rate, and investors and exporters (I&E Window), into the I&E window. In this blog post, we will explore the implications of this policy change for individuals and the Nigerian economy as a whole.
Understanding Exchange Rates: Before delving into the policy changes, it’s essential to understand exchange rates. An exchange rate is the rate at which one currency can be exchanged for another currency. This rate plays a significant role in international trade and money movement between countries. Exchange rates can fluctuate due to factors affecting the local currency (Naira) or the foreign currency (Dollar).
Fixed vs. Floating Exchange Rate:
In the past, Nigeria had a fixed or pegged exchange rate, where the Central Bank set and maintained an official rate against the Dollar. However, the new policy adopts a floating exchange rate regime, determined by market forces through supply and demand. This change aims to increase transparency and align the exchange rate more closely with market dynamics.
Reasons for Naira Unification:
The move towards unification was long advocated by experts and institutions like the World Bank. Multiple exchange rates were deemed expensive, detrimental to market participants, and led to higher inflation, hindering the private sector’s growth and deterring foreign investment. The spread between official and parallel rates allowed certain individuals to profit from the exchange rate disparity, creating distortions in the economy.
Impact on Foreign Investment:
The multiple exchange rate system negatively affected foreign investment in Nigeria. The exchange rate disparity made it unattractive for investors as they faced significant losses when converting their profits back to foreign currency. The unification of exchange rates is expected to reduce uncertainty and encourage foreign investment, potentially bolstering Nigeria’s economy.
Changes in the New Exchange Rate Policy: With the unification, all exchange rates have been collapsed into the I&E window, determined by market forces. The preferred rate for transactions like school fees, business travel allowance, personal travel allowance, medicals, and SME funds will now be based on the I&E window rate.
The reintroduction of the Willing Buyer, Willing Seller model allows eligible transactions to access foreign exchange at a mutually agreed rate, promoting market-based pricing. Additionally, an order book has been reintroduced to enhance transparency in exchange rate quotes and facilitate fair pricing.
The Naira for Dollar scheme, where Nigerians received 5 Naira for every $1 they received, has been scrapped. Furthermore, the operational hours for forex trades have been fixed from 9 am to 4 pm Nigerian time.
Conclusion:
The unification of Nigeria’s exchange rate is expected to reduce distortions in the economy and attract foreign investment. It simplifies the process for individuals engaging in foreign transactions. The policy changes promote transparency and market-driven exchange rates, which may benefit the Nigerian economy in the long run. However, only time will tell whether these reforms will lead to economic growth and positive impacts on the nation’s prosperity.