Tuesday, February 20, 2024

Floating the Naira Explained – Implications of the New CBN Dollar Exchange Policy

You may not have knowledge of economics, but you can still know what floating the naira means. This explanation will be as basic as possible.

Initially, one of the biggest issues individuals and companies in Nigeria faced was access to dollars.

As an international investor who wants to do business in Nigeria, you must use CBN to bring dollars into the country; for instance, if you want to bring in 50 million dollars, you must convert them at the CBN rate.

If you want to take money out, you will also take it out at the CBN rate.

It takes a lot of time and effort to achieve that. Imagine how long Form A takes, but a little shorter.

But then, CBN has controlled how much money they give to BDCs, which means if you were trying to use a BDC to sort your travel abroad at the black market rate, there would not be enough dollars for you.

This is one of the reasons Nigeria owes the United Arab Emirates $800 million. Their money is stuck in naira, they cannot take it out in USD because there are not enough dollars.

Now that the naira is floating, everybody is allowed to source for dollars from anywhere. This is where market economics comes in.

If Mr. A chose to sell a dollar at 900 naira per dollar, Mr. B would sell at 800, and Mr. C would sell at 850. People will flock to Mr. B, who sells at 800, first; if that person’s own sale finishes, then they will go to Mr. C, who sells at 850.

If Mr. A, who sells at 900, is not doing any business, he can choose to sell at 790; people will rush to him, and it keeps going like this. As long as there are a lot of people who have more dollars to sell, the rates will come down.

Remember that CBN is also a seller, just not the only one. So now CBN can choose to sell at 755, and as long as they keep having dollars to sell, people will rush to them.

Just like what you see at filling stations. Initially, when the subsidy was removed, petrol was sold at 520 or more. Now, most filling stations sell for 495 Naira.

Now imagine if these filling stations could import their own fuel. They can bring in fuel and even sell at 300, everybody else will have to reduce their own price if they want to make money, because competition will be high.

One thing that hinders investment in Nigeria is that investors do not like extreme volatility In finance.

I want to be able to calculate the risk of putting $1m into a fish importation business for example, things I don’t want to worry about is access to dollars to trade with, also what price is the dollar going to be.

By floating the naira, which means allowing banks and other institutions to buy and sell dollar at their own rates, it will bring even more access to dollars because everybody doesn’t have to go meet CBN for dollars.

Implications of floating the Naira

  1. You can now use your Naira Visa, Verve, and Master card freely across online shopping platforms including AliExpress, Google play, Amazon.
  2. There would be more dollars in circulation.
  3. The rates of Dollar to Naira exchange will drop.
  4. Foreign investment into Nigeria will improve.

List off Bank Sort Codes in Nigeria