The Central Bank of Nigeria, CBN, on Tuesday says it was adopting a “flexible foreign exchange rate” regime.
“The adoption of a “flexible exchange rate” regime is basically the CBN allowing the Naira to float against the dollar at the interbank, rather than holding on to a fixed peg,” Nairametrics say.
In what analysts refer to as “semi-float” the CBN stopped shy of announcing a full float because it still resolved to retain the official exchange rate of N199 which it says it will use for funding “critical transactions.”
“What this means however is that buyers of forex for holiday, school fees, medical tourism, online payments etc. purposes, will have to source for forex from the interbank at market determined rates and will no longer be able to buy forex at N199 or whatever official rate the CBN decides to adopt. So no more round tripping, no more arbitrage (at least except you are Buhari or Emefiele or whoever they sell to at N199). The CBN has basically shut the window to all Nigerians looking to buy dollars at official rates,”
The CBN will need to put a massive structural operational framework in place to ensure this works perfectly, Nairametrics added, as a market determined rate will also require strong regulations around a market that involves everyone with prices that are market determined.
Black markets will also disappear as one can easily walk into a bank and ask to buy forex at the market rate.
“For Nigerians to have a single market determined exchange rate there will have to be a significant inflow of dollars into the market at least large enough to meet 70% to 80% of demand. Without this, there will continue to a spike in exchange rate, – one thing is we can’t bet against is the Naira strengthening to below N300 in the next 6 months,” Nairametrics added.