Let’s save some time and start by responding to your most pressing queries on the proposed unified rates and Naira depreciation. Will the value of the naira decline? Yes. When will it occur? Soon, most likely before the announcement of a new minimum wage. Will the foreign currency markets eventually be unified? That is a very different can of worms. Let’s explain.
President Bola Tinubu reiterated during a meeting with the governors of the All Progressives Congress (APC) that his administration would synchronize the foreign exchange markets. For years, the dollar and other foreign currencies were traded at one rate at the Central Bank of Nigeria (CBN) and another one at a market known as the parallel market in Nigeria.
Making the dollar sell for the same price at the CBN, authorized dealers, and the parallel market is what the new government vowed to achieve.
What Can We Learn About FX Unification from History?
This path has been travelled before. We have done this before, and we might do it again. Nigeria misrepresented the exchange rate of the naira to the dollar from 2015 to 2016 as N197/$1. The naira was being kept artificially low, the world and our parallel market warned, but we insisted it was N197 per dollar for sixteen months. The greatest recession Nigeria has had in decades was brought on by this action as well as a few other economic myths that were shared.
Since 2015 till date, there has been no unity despite the significant fall of the naira. Even the price per dollar on the parallel market has always flatulated.
How Then is Unification Accomplished?
The naira declined as much as N520 per dollar in February 2017 from N334 to the dollar at the parallel market in 2016. However, the CBN established an FX window for investors and exporters to address the problem. The fixed dollar rate set by the CBN was not used in this I&E window. The price was left up to market forces. The going rate on the market was about N360 to the dollar. Local and international firms that required dollars but were unable to obtain them from the CBN due to the rate of N305 per dollar simply went to the banks and asked for dollars at N360 and received them. The banks quickly resumed their position as the primary currency dealers.
The naira started to rebound, as fundamental economics instructs, and by December 2017, it was trading between 360 and 364 at the parallel market and the I&E window. Nigerians believed that unification had been accomplished.
NOTE: Unification was not fully achieved since big oil marketers continued to receive dollars at the CBN rate of N305 per dollar, which was used to artificially maintain cheap gasoline prices for Nigerians. Win-win?
How Will This Affect You?
The president strongly recommending monetary policy is a bold one. Since the nation lacks the foreign exchange to maintain the dollar at N461, the next step will most likely be to devalue the naira to attract foreign exchange and investments.
Since the majority of products and services are now priced at the parallel market cost, not much will change for the average Nigerian. Prices should, if anything, decline, but given that this is Nigeria, that is improbable. Students and businesses filling out Form A and Form M to obtain foreign exchange to study abroad or import products and services will likely have the new rate applied.
Devaluation and unification will give states and state governors more money to share at FAAC meetings, particularly to pay the new minimum wage if and when it is passed.
More investments in Nigeria and more jobs for Nigerians are possible if we can maintain stable rates and stimulate the influx and outflow of investor cash. In addition, international companies will move back to Africa’s economic superpower, Nigeria. So, how will this affect you? Only the future can tell, but from our projections, the ordinary Nigerian will likely have a fair or near-stable life over time.