What is the meaning of CBN “Floats” The Naira?

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Lots of business people expected the devaluation of the Naira by the CBN but the apex bank decided to abandon its fixed rate policy in favour of a flexible and multiple market model, which implied a floating exchange rate regime. So what does it mean to “Float” the exchange rate?

According to Vanguard Newspaper “By the new exchange rate regime, CBN would allow the Naira to float against the US dollar at the inter-bank market, rather than holding on to a fixed peg. What this means, however, is that buyers of foreign exchange for importation of goods, holiday, school fees, medical tourism, online payments etc, will have to source from the inter-bank market-determined rates and will no longer be able to buy forex at N199 or whatever official rate the CBN decides to adopt.”

Also Analysts at Nairametrics provided a good insight to what this new policy means

The adoption of a “flexible exchange rate” regime is basically the CBN allowing the Naira to float against the dollar at the interbank, rather than holding on to a fixed peg. In what our analysts refer to as “semi-float” the CBN stopped shy of announcing a full float because it still resolved to retain the official exchange rate of N199 which it says it will use for funding “critical transactions.”

What this means however is that buyers of forex for holiday, school fees, medical tourism, online payments etc. purposes, will have to source for forex from the interbank at market determined rates and will no longer be able to buy forex at N199 or whatever official rate the CBN decides to adopt. So no more round tripping, no more arbitrage (at least except you are Buhari or Emefiele or whoever they sell to at N199). The CBN has basically shut the window to all Nigerians looking to buy dollars at official rates.

It is unclear how this will work as the CBN will need to put a massive structural operational framework in place to ensure this works perfectly. A market determined rate will also require strong regulations around a market that involves everyone with prices that are market determined. One expects the black market to disappear as all you need to do is walk to the bank and ask to buy forex at the market rate.

It is also important to note that for Nigerians to have a single market determined exchange rate there will have to be a significant inflow of dollars into the market at least large enough to meet 70% to 80% of demand. Without this, then we will continue to see a spike in exchange rate. One thing we can bet against is the Naira strengthening to below N300 in the next 6 months. The naira is not dropping below N300 anytime soon (except CBN rate) so the most we can hope for is that is stabilizers around N320. If foreign investors remain resolute at not investing in Nigeria, then things will only get worse. A N400/$1 could just be the new normal. Thus, if you have dollars and don’t have significant use for it, hold otherwise sell!

Nairametrics will continue to update its readers on this very important development so stay logged in.

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