Naira depreciates fast as CBN allows free float against dollar

The Central Bank of Nigeria (CBN) has implemented a free float of the national currency, resulting in the naira trading at 702.19/dollar at the close of business on Thursday.

This represents a depreciation of about five percent compared to the previous day’s rate of N664.04/dollar. The decision to allow the free float comes alongside indications that the CBN may soon supply foreign exchange to the market.

The removal of rate caps on the naira at the official Investors’ and Exporters’ Windows of the foreign exchange market was directed by the CBN to Deposit Money Banks. This move aligns with President Bola Tinubu’s recent promise to unify the nation’s multiple exchange rates. It also coincides with the suspension and detention of CBN Governor Godwin Emefiele, whose unconventional monetary policies had posed challenges for investors and the economy.

The CBN’s decision to float the currency has been praised by the organized private sector and economists, who believe it will unify exchange rates and bring stability to the FX market. Under the new system, buyers and sellers in the official FX market can quote rates they find comfortable, shifting away from the previous practice of rate dictation by the CBN.

Following the implementation of the free float, the naira has experienced a decline, with a closing rate of 702.19/dollar at the Investors’ and Exporters’ Window. It is important to note that the accuracy and legitimacy of the disclosed rates are subject to further market developments and scrutiny.

The collapse of all foreign exchange segments into the Investors’ and Exporters’ Window was outlined in a statement by the CBN. The statement also highlighted the reintroduction of the “Willing Buyer, Willing Seller” model at the window, indicating that eligible transactions can access foreign exchange through this channel. However, it is crucial to note that market stability and the prevention of excessive volatility remain important considerations.

Experts have weighed in on the move, acknowledging both benefits and drawbacks. While a free market determines rates, devaluation may occur, which could attract foreign investors but also lead to further devaluation and asset devaluation. Manufacturers anticipate improved access to foreign exchange, market efficiency, and export market penetration. However, imports may become more expensive, potentially impacting consumers.