Unified Exchange Rate: CBN warned against immediate floating of naira

The unification of exchange rates should not be a one-step process but should be implemented over a period of time, however short it may be.

News Agency of Nigeria • June 15, 2023

A composite of Naira, Cedi, and Cfa notes used to illustrate the story.

A financial expert, Uche Uwaleke, commends the Central Bank of Nigeria’s attempt to unify the country’s exchange rate. Mr Uwaleke, however, cautioned against a sudden free float of the naira.

The professor of Capital Market at the Nasarawa State University, Keffi, said this in an interview on Wednesday in Abuja,

According to him, the economic fundamentals required to support floating the naira are still very weak, especially in sourcing forex.

“Let me say upfront that I support the unification of exchange rates, which makes for a more transparent forex market. But I think that the CBN should implement that in a way that does not cause massive distortions in the general price level,” stated Mr Uwaleke.

The capital market professor also mentioned that it “is rather early to bank on sustainable capital inflows from foreign direct investments” due partly to insecurity and the unconducive environment of doing business in Nigeria.

“This sudden naira devaluation may draw foreign portfolio investments, which is part of the reason the stock market is surging,” stressed the financial expert. “But we also know that portfolio investments are hot money and do not represent a sustainable source of forex inflows.”

He also said that the unification of exchange rates should not be a one-step process but should be implemented over a period of time, however short it may be.

According to him, empirical evidence suggests that reforms are more successful when sequenced and implemented in phases.

“This is against the backdrop of the oil subsidy removal, which, taken together, can result in galloping inflation and rising poverty level. So, while fiscal and monetary policy reforms are welcome, absolute care should be taken to strike the right balance and minimise their unintended consequences,” added Mr Uwaleke.

The CBN officially floated the naira on Wednesday, as the Investors and Exporters (I&E) exchange rate window hit N755 to $1. That implies a 21 per cent depreciation of the naira compared to the previous rate of N463 to $1.

With this development, buyers and sellers of foreign currency in the official FX market can now quote rates they find comfortable in the FX market.

This is against previous practices that the CBN dictated rates.

(NAN)

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