What Should the Naira Float Mean to You
The floating of the naira is good in principle. It is the first step in a series of reforms that the country needs.
Just like buying tomatoes in a market for the agreed price between you and the seller, you can now do the same with the naira. The banks are no longer obligated to sell it at the predetermined price of N460 per dollar (which was hardly available anyway). If the banks believe the dollar should be priced at N600 and you can afford it, that’s what it will be. If it’s N800, that’s what it will be. Currently, it’s N750, with one rate for everybody.
Nigeria stands to earn more revenue from dollar earnings through oil exports. Instead of receiving N460 for every dollar, it can now receive N750.
If you export from Nigeria, you will also be able to earn more because the cassava flour you sell to the UK market for $10 would suddenly increase from N4,600 to N7,500.
While sellers in the international market may benefit, buyers may lose out. Since Nigeria imports many of the goods it uses, prices are expected to increase. However, it’s worth noting that the price increases would be minimal as most imports were already obtained at the black market rate of N750, not N460.
Unfortunately, some businesses, especially startups, may struggle as a result of this policy change. For example, if you had borrowed $1 million from investors and conduct your business in naira, your debt has suddenly increased from N460 million to N750 million.
Fuel prices may also rise because imported fuel will no longer be subsidized for the NNPC at N460/$. Instead, it will be imported at the rate of N750, leading to an increase in fuel prices. So, those in Lagos buying fuel at N500/litre should prepare for N600/litre. Those outside Lagos should gear up for N700/litre.
What does the future hold for the dollar?
It depends on the government’s actions going forward. As I have emphasized before, stability is more important than price. Even if the dollar stays at a single value of N800 or in a small band, such as during the period when Sanusi Lamido Sanusi was the governor of the CBN (when the naira stayed at N147 — N152 for over 5 years at the parallel market), it’s preferable to a continuous fall, even if it means going from N200 to N500. Why? Because stability allows the government, businesses, and investors to plan effectively.
To reiterate, the long-term value of the naira is not the primary concern; rather, its stability over an extended period is crucial. For example, one dollar gives you 1,270 South Korean Won or 14,800 Indonesian Rupiah. However, these economies are better than Nigeria’s because investors and businesses know what to expect. They can make plans and confidently invest, knowing that if they put $100k into these economies, they will retrieve at least $100k when the time comes to pull out their funds for whatever reason.
If you invested $100k in the Nigerian economy in 2015 (when $1 = N200), and you want to withdraw it now in 2023, you would only be left with $26,667 ($1 = N750). An investor would prefer to burn their funds rather than allow such a loss.
So, how can the government ensure stability of the naira?
Among other measures, the following should be adopted (by the way, these are policies the Peter Obi administration promised):
1. Transparent communication of monetary policies: The CBN has yet to provide an explanation of this new policy; there has been no policy announcement from the apex bank. It’s important for the government to communicate directly rather than relying on third parties to convey the information. Investors want to hear directly from the government.
2. Export diversification: One of the main reasons the CBN began rationing dollars was due to limited availability during periods of low oil prices. Nigeria relies too heavily on oil revenue, which is problematic as there will always be periods of low oil prices. With the global focus on climate change and even Saudi Arabia building a renewable energy war chest, high oil prices are unlikely to return. Nigeria needs to diversify its exports to reduce dependence on oil and maintain a stable naira.
3. Enhance investor confidence: Implementing policies that attract foreign direct investment (FDI) and promote domestic investment can boost investor confidence in the Nigerian economy. Can they seamlessly clear goods at the ports? Will they pay 50% of the capital as bribes to government authorities? Is there a transparent tax remittance system in place? Will they be scared of moving in the North or Niger Delta because of fear of kidnapping? If investors do not feel confident in Nigeria, their dollars will not come. If their dollars do not come, there will be none to be exchanged for naira.
4. Fiscal Discipline: Especially in terms of government spending, fiscal discipline is key. Do we spend more than we earn? Do we spend so much on salaries and little on capital projects like infrastructure like building ports, roads, and other amenities that will ease businesses? Are we taking a lot of debt that would mean paying back huge sums in foreign exchange to foreign entities?
Other mechanisms to consider include managing remittances from the diaspora, collaboration between the federal government and the CBN, and implementing necessary structural reforms. The floating of the naira is merely the first step in a comprehensive plan to ensure the success of this policy shift.
There is no reason to celebrate at this moment. The true test lies in the actions that follow.
