The presidential candidate for the People’s Democratic Party (PDP), Atiku Abubakar recently advocated for the floating of the Nigerian currency, the Naira. Currency float is a currency exchange regime where the exchange rate of a particular currency with respect to other currencies is allowed to be determined by the forces of demand and supply. By advocating a freely floating Naira, Atiku was proposing that the exchange rate of the Naira vis a vis the US Dollar and other currencies be allowed to be determined by market forces.

In a quick and sharp rebuke, the sitting governor of the Central Bank, Godwin Emefiele pointed out the disadvantages and reasons why the Naira should not be given wings to fly by allowing it to float. It is imperative to note that various governments in Nigeria have tried various methodologies and strategies to stern the depreciation of the Naira. In 1986, the Exchange Rate Liberalization Policy was introduced and with it, the Naira was devalued officially for the very first time, on September 26th, 1986, to be specific. From that day till today, the Naira has been heading south.

Economic and financial historians have it that Nigerian governments have tried to manage the exchange rate with the Foreign Exchange (Monitoring & Miscellaneous Provisions, FEMM) Act 1995, the Two-way Quote System (market making) in the inter-bank FX market in 1996 and the Wholesale Dutch Auction System (WDAS) in 2006. On June 27th, 2016 the CBN launched the Naira-settled OTC FX Futures Market. Unfortunately, it seems that none of those have worked as was expected, to say the least.

Bua group

At the risk of being called out by those who feel that learning or borrowing a leaf from the West is “slave mentality”, I would like to state that most currencies with stable value, like the US Dollar, USD, the Great Britain Pound, GBP, are freely floating currencies. The question then is, how are they freely floating and yet stable? One reason for that is that those economies have and use various instruments of currency risk management. US businesses, importers and exporters alike can manage their currency risks effectively using such financial derivatives like currency swaps, currency futures, currency options, and currency forwards. In Nigeria, there is hardly any means of managing currency risk other than the FX futures market, the understanding of which has not been very effective. Without providing businesses, exporters, importers and the people with the instruments to manage their currency risk, any attempt to float the Naira will only provide it with wings to fly away, literally.

As it is today, most Nigerians settle their foreign currency needs through the spot market either via the parallel market or official market. In these markets and because of lack of alternative source of currency risk management, the demand for the Dollar and other foreign currencies far exceed the supply, leading to depreciation in the exchange rate of the Naira.

Therefore, before floating, the Nigerian Stock Exchange, the Security and Exchange Commission, The Central Bank, and FMDQ should engage the services of experienced financial engineers that understand the workings of the Nigerian market and people to design effective instruments of currency risk management. In next posts, I will give examples of how the various instruments like Currency Swaps, forwards and options can be used to manage exchange risk.

In addition, getting the Naira to stabilize will take not just the efforts of the government and its institutions to provide the needed instruments of currency risk management, it will take the will and deliberate efforts of Nigerians to say enough is enough. The elasticity of demand for imported “anything” in Nigeria is highly inelastic. Nigerians have insatiable and dangerous appetite for imported items and as long as that tendency continues, the demand for the Dollar or any foreign currency required to consummate the importation will continue to outstrip the supply and consequently, the Naira will continue to lose its value, howbeit slowly. As the CBN governor pointed out, who could have imagined that as at today, Nigeria, with its vast array of lands, will be importing palm oil. Once again, it is the responsibility of the government to ensure that those items that are being imported, which Nigeria has the ability and capacity to produce are produced at home by providing the enabling environment for such productions to take place.

Agreed that curtailing our desire for imported items will help, may I point out here that the US is a net importer, year in year out, yet, the Dollar remains relatively stable just because there many methods or instruments of managing exchange risks available to Americans. In conclusion, my take on this debate is that floating the Naira is a good thing, but the time is not right as at moment, not without the availability of exchange risk management instruments. Please do not float.

1 COMMENT

  1. For your information,tthe U.S dollar or the british pound is not floated.they uses the price of the gold AS MEASUREMENT OF STANDARD.Now the dollar was under pressure since 1950,under Mr Nixon,the dollar was taken off.nowi do not knows,where you’re getting your information,where you brief your Nigerian viewe rAll currencies are under bracket.THE FIXINGOF OTHER NATIONAL CURRENCIES AGAINST OTHER CURRENCIES ARE BASED ON POLITICAL REASON,ALSO FOR VARIOUS NATIONAL GOV TBE ABLE TO MANAGES THEIR NATIONAL BUDGETS AND IT’S INTERNATIONAL TRADE.
    The reasons why the dollar is OFF gold is beyond the scope of this aticle,when the british wanted to joined the EURO,as a single currency,they started to shadowing the German’s mark.i.e to bring all other European currencie swithin a known currencies bracket,as the german’s economy is biggest economy in Europe
    Britain’s pound stayed outside the EURO,viewers may have read that Mr Soro broke the pound,which means the pound was under a currency bandor bracket.
    The value of other currenciesis not based on supply and demand

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