The recent introduction of a currency floatation policy for Nigeria’s Naira has generated significant discussion and raised questions about its implications.
I want to clarify from the beginning that, as a lawyer and social entrepreneur , I do not possess extensive expertise in matters related to the economy, banking, finance, or forex stabilization. However, I aim to offer my perspective on the concept of currency floating, its purpose, the timing for its implementation, and essential considerations to minimize potential adverse effects.”
To shed light on this topic, it’s essential to examine the previous two-tier foreign exchange (forex) system in Nigeria and the existence of a parallel black market for forex.
I. Currency Floatation – What Does It Mean?
Currency floatation, in simple terms, refers to the decision by a government or central bank to allow the exchange rate of its currency to be determined by market forces of supply and demand, without significant intervention. In the case of Nigeria’s Naira, it means that the Central Bank of Nigeria (CBN) has moved away from a fixed or controlled exchange rate regime and now lets the Naira’s value fluctuate based on the forex market.
II. Why and When Should a Currency Floatation Policy Be Implemented?
Economic Reality: A currency floatation policy is often adopted when a fixed exchange rate becomes unsustainable due to external pressures, such as dwindling foreign reserves, trade imbalances, or a misalignment with market conditions.
Flexible Response
It allows for a flexible response to changing economic circumstances. During times of economic volatility, a floating exchange rate can help absorb external shocks and maintain economic stability.
Encouraging Foreign Investment
A floating currency can make a country’s assets more attractive to foreign investors as it reflects market realities, potentially attracting foreign capital.
Correcting Imbalances
A floating exchange rate can help correct trade imbalances by allowing the currency to find its equilibrium level, making exports more competitive and imports more expensive.
III. Factors to Consider to Mitigate Adverse Effects of Currency Floatation:
Exchange Rate Volatility: Volatility can create uncertainty for businesses and consumers. Policymakers should monitor and manage excessive exchange rate fluctuations to maintain stability.
Inflation
A depreciating currency can lead to imported inflation. Effective monetary policy is crucial to control inflation and prevent it from eroding purchasing power.
External Debt:
A country like Nigeria with substantial foreign-denominated debt must carefully manage currency floatation to prevent debt burdens from increasing due to currency depreciation.
Capital Controls
In some cases, temporary capital controls may be necessary to prevent excessive speculative activities in the forex market.
Communication
Effective communication by the CBN and the Federal Government is vital to ensure that the public understands the rationale behind the floatation policy and its expected benefits.
In the case of Nigeria’s Naira, transitioning from a two-tier forex system to a floating exchange rate reflects a commitment by the President Bola Tinubu administration to adapt to changing economic conditions. However, as our policymakers must have discovered by now, floatation is a complex policy decision that carries both potential benefits and risks.
In the current situation we face in Nigeria, with the implementation of the Naira flotation policy which has resulted in a significant loss of value for the currency, high inflation and an unbearable cost of living with attendant insecurity, the government faces the challenge of mitigating the damaging impact and restoring confidence among citizens and it is imperative for government to consider taking steps to address the situation immediately. The President Bola Ahmed Tinubu Administration may wish to consider some steps which may include:
Stabilise Inflation: Prioritise monetary policy measures to control inflation. The central bank should use interest rate adjustments and other tools to curb rising prices.
Social Safety Nets
Implement targeted well funded and carefully managed social safety net programs to provide support for the most vulnerable segments of the population who are disproportionately affected by the cost of living increase.
Fiscal Policy Adjustments
Review and adjust fiscal policies to ensure responsible budgeting and reduce deficit spending. This may include cutting non-essential expenditures and exploring revenue-enhancing measures. The President has shown a commitment to this with recent steps taken to reduce convoy and foreign travel expenses by 60%, but this is still and drop in the ocean and needs to extend across all sectors.
Exchange Rate Management
If necessary, the government can intervene in the forex market to smooth extreme exchange rate fluctuations, gradually rebuilding confidence in the Naira.
Economic Diversification
Invest in economic diversification strategies to reduce reliance on oil exports, which can make the economy vulnerable to oil price fluctuations.
Investor Confidence
Implement policies to boost investor confidence, such as creating a stable and predictable regulatory environment and promoting foreign direct investment.
Transparency and Communication
Maintain transparent communication with the public, explaining the reasons behind the policy decisions and outlining the government’s plans for economic recovery.
Financial Inclusion
Promote financial inclusion to ensure that a wider segment of the population has access to financial services and can participate in the formal economy.
Infrastructure Investment
Invest in critical infrastructure projects that can stimulate economic growth and job creation, which can help alleviate some of the economic hardships. Nigeria’s current infrastructure deficit combined with subsidy removal and currency floatation is bound to create unprecedented negative impact on development.
Long-Term Planning
Develop and communicate a long-term economic recovery plan that outlines clear goals and strategies for improving economic stability and prosperity.
It is important to recognise that restoring confidence and mitigating the impact of a currency floatation policy can take time, and success may require a combination of short-term and long-term measures.
Additionally, the President Bola Tinubu led government should engage with relevant stakeholders, including business leaders, economists and civil society, to ensure a well-rounded and inclusive approach to economic recovery.
A well-informed public and transparent communication from policymakers are crucial elements in this process.
Henry Balogun, Lawyer, Social Entrepreneur and former Chief of Staff, Office of the Deputy Governor, Lagos State is the publisher of HB Report.
