The Central Bank of Nigeria (CBN) has taken a significant step by devaluing the Naira to 630/$1, a change from the previous rate of N461.6 at the Importers and Exporters (I&E) window. This move comes shortly after President Bola Ahmed Tinubu’s announcement of the government’s plans to unify the country’s exchange rate, with the aim of stimulating the economy. The devaluation is expected to redirect funds from arbitrage towards meaningful investments in the real economy.
The wide margin between the I&E window and the parallel market has been a concern, as it has encouraged round-tripping with Bureau de Change operators. To address this issue, the CBN has implemented various measures, including a complete halt in the sale of forex to BDCs. In line with this, President Tinubu held meetings with strategic institutions, including CBN Governor Godwin Emefiele, to discuss exchange rate matters.
At the recent weekly bidding for foreign exchange, the CBN sold the spot rate to banks on behalf of their customers at the new rate of N631 to a dollar, and most bidders received the full amount they requested. Consequently, prices at the parallel market have started to decrease. In Abuja and Kano, for instance, prices dropped from N750 to N745 per dollar.
The naira’s value in the parallel market has reached its lowest point in a year, driven by expectations of a potential change in exchange rate management under the new administration. Umar Salisu, a BDC operator, reported that the naira dropped to N762 per dollar, compared to N775 the previous day.
The widening exchange rate arbitrage over the past three years, from N100 per dollar in 2020 to over N400 per dollar last year, raised concerns among development institutions like the International Monetary Fund (IMF). They emphasize that excessive differentials could lead to unhealthy manipulation and negatively impact market stabilization efforts.
To stabilize the naira, the CBN has intervened significantly in the foreign exchange market, spending approximately $42 billion between 2020 and 2022. However, the official rates at which the currency was sold to end-users, including students and tourists, were far from the effective exchange rate of the naira.
Dr. Muda Yusuf, Director of the Centre for Promotion of Private Enterprise (CPPE), estimates that adopting a realistic exchange rate regime could contribute an additional N4 trillion to the federation account. The current exchange rate regime poses a considerable burden on the economy and public finances.
While the devaluation of the naira may lead to increased inflation and a decline in purchasing power, there might be some temporary benefits. Basil Abia, a private research consultant, suggests that foreign investors could find attractive opportunities in Nigeria’s domestic financial markets. The influx of foreign portfolio investments (FPI) might experience a temporary increase.
However, the devaluation will have consequences for the 2023 Appropriation Bill, as highlighted by Professor Uche Uwaleke, an expert in the capital market. The budget, based on an exchange rate of N435 per dollar, will be severely impacted. Additionally, the devaluation could affect fuel prices, inflation, and interest rates, which can discourage both local and foreign investments.
In conclusion, the recent devaluation of the Naira by
the CBN and the plans for exchange rate unification signal a significant shift in Nigeria’s economic landscape. While the move aims to stimulate the economy and address issues in the forex market, its implications on the 2023 budget and various sectors need careful consideration.