On Wednesday, the CBN apprised Nigerians of new changes to the Foreign Exchange (FX) market. The country’s big bank will now “float” the exchange rate rather than dictate it. 

The move was made to unify the naira exchange rates, which previously had different values depending on how the dollar was sourced. 

What does it mean to ‘float’ the exchange rate? 

Before the announcement, the CBN had dictated the official FX rates: You got ₦462 for $1 through official channels. But due to a high demand for dollars by Nigerians (for imports, international school fees and so on), a scarcity ensued. 

That led to people seeking dollars from non-official channels and the creation of a parallel market, also known as the black market (“Abokis”). In time, the gap between official and black market rates widened. At the time of the announcement, the official rate was under ₦500 to a dollar; the black market rate was over ₦700 to a dollar. 

By authorising commercial banks to freely trade FX, the value of Nigeria’s currency will be determined by market forces. In other words, the exchange rate will be traded according to demand and supply. Rather than sticking to a fixed exchange rate as stipulated by the CBN, commercial banks and FX buyers and sellers can determine the value at which they trade by themselves. This freedom to trade without the CBN’s dictates and interference is known as “floating”. 

What are the potential effects of floating the exchange rate?

Whether the effects of the FX floating will be negative or positive depends on various factors. All that can be said with certainty is that over the next few weeks and months, things will get clearer. 

Nonetheless, here are a few things that you can expect to be affected. 

1. Businesses

The float can help export-oriented businesses to gain a competitive advantage, which should boost their profit. 

Import-oriented businesses, however, may face a challenge. A depreciating naira makes procuring raw materials or tools more expensive, directly affecting their profit.

2. Arbitrage

Arbitrageurs thrive by taking advantage of the differences between prices across different exchange rates. Before now, such businesses were able to buy dollars for cheap through official channels and sell at a much higher rate via the parallel market. Unifying the FX rates neutralises or minimises arbitrage, which suggests some businesses will have to switch business models. 

3. BDCs/Abokis:

Black market demand for the dollar is expected to reduce. But this is dependent on how quickly the backlog of requests for dollars at the banks can be cleared by commercial banks and the amount of dollars made available. 

A cynical but reasonable prediction will have banks unable to deal with dollar demand, thereby pushing people back to Bureau de Change operators. 

4. PTA, BTA, Visa Fees, Foreign School Fees

People earning in naira but requiring dollars to travel or japa are probably the worst hit by the new policy. Where they could get $1,000 for around ₦500,000 naira before the CBN’s announcement, they may now require more than ₦750,000 naira to receive the same $1000. A ₦250,000 difference is no joke. 

On the other hand, for those who receive money from their family or friends abroad, Christmas has come early. A cash gift of even $500 through official channels has significantly appreciated.   

Conclusion 

The CBN’s decision to float the exchange rate will come with changes. Some of these changes will strike certain businesses and individuals as positive; others may not feel the same way. 

Already, commentators on social media have presented conflicting views on the overall effect of the policy on the economy. Some have said that the cost of the dollar will only go higher; others have said the price of the dollar will crash. It’s not quite clear which side is correct. We will have to wait and see.