The massive devaluation of the naira in June 2023 is a positive move, but it won’t be enough to fulfil the new administration’s goal of unifying Nigeria’s foreign exchange system.
The devaluation was substantial, yet it may not produce a fundamental reform of the system. The current Investors & Exporters window was initially proposed to operate based on market-determined exchange rates. This is what the CBN asserted when it introduced the system in April 2017.
What changed this week was that the CBN allowed market forces to prevail, instead of its prior practice of controlling exchange rates, even though the system was meant to be based on willing buyer, willing seller principle.
The I&E window was not the first time the CBN attempted to liberalise the system. In June 2016 the bank supposedly floated the Naira when it launched what was said to be a market-determined interbank foreign exchange market. The naira was devalued to match the parallel market. For a while, the currency was even weaker in the official market than in the black market.
Both times the CBN devalued the naira and promised free market rates, it soon reverted to pegging the currency.
To achieve a unified and stable exchange rates regime the government and CBN must abandon the long-held myth of a strong naira and the belief that the state should channel subsidised forex to certain economic sectors. They should also scrap capital controls, including bans on certain imports, that restrict entry into the official market and drive individuals and organisations to the black market.
It is also crucial that policymakers understand why under market forces the Naira constantly depreciates. The most important factor has been the excessive growth in the money supply in the economy, largely driven by money printing to finance government deficit spending.
