Nigeria not ready for CBN's proposed free floating of the exchange rate - Joseph DAVID

In respect to a publication by Guardian newspaper (https://m.guardian.ng/news/cbn-signals-end-to-official-rate-regime-for-naira/), dated 13th June, 2019, and titled "CBN signals end to official rate regime for Naira", it is imperative to state that, the attempt is currently inappropriate, considering the Nigerian export and import position, as well as high dependence of the country on imported goods and services. 

In principle, while allowing the exchange rate to float freely could aid in achieving an equilibrium exchange rate, due to the determination of the real value by the interplay of market forces of demand and supply. However, in the Nigerian context, employing this technique of exchange rate determination against the current managed floating, which allows the exchange rate to float within a specific benchmark set by the monetary authority (CBN), may spell doom on the Nigeria economy, as well as the populace. 

For instance, considering the high dependence on foreign receipt from oil and gas export (more than 90% of total export, which is even on the decrease due to fall in the global oil price) in financing government's expenditures, which also accounts for more than 60% of central government's revenue source, as well as the high and crazy demand and taste for foreign goods and services by Nigerians, that is below the value of importations, any attempt to free float the exchange rate will only result into a large depreciation in the Nigerian Naira against dollars and currencies of Nigeria' major trade partners. 

In the same vein, since the demand for Naira is very low, in comparison to the demand of foreign currencies by Nigerians, due to weak export base of Nigerian economy, hence, any attempt to determine the exchange rate by the market forces of demand and supply will raise the general price level (inflation), due to the fact that importers will most likely transfer the costs incurred in importing to the end users of goods and services imported from abroad. 

In essence, it is recommended of monetary authorities (CBN) to maintain the status quo of managed floating system of exchange rate determination, since the proposed free floating tends to be of more harm than benefits to the Nigerian economy and the populace, pending the period in which Nigerian export base is fully diversified, with multiple sources of foreign earnings. 

Joseph DAVID

Poverty & financial/monetary Economist, Researcher, data Analyst, cum Econometrician.