Challenges Faced in the Early Stages of Exchange Rate Unification in Nigeria

Explore the challenges encountered during the initial phase of exchange rate unification in Nigeria and understand the impact on market confidence, accessibility to foreign exchange, and foreign investments.

In a bid to harmonize Nigeria's dual exchange rate system, the Central Bank of Nigeria (CBN) introduced the FX-managed float system in June 2023. The goal was to unify the exchange rate and bridge the gap between the official and unofficial foreign exchange markets. However, just two months into the unification process, several indicators suggest that significant challenges are impeding the success of this endeavor.

Insufficient Progress in Unification:

Despite the efforts made, the gap between the unofficial market rates and the official rates continues to persist. This indicates that the exchange rate unification process is yet to achieve its intended goal of bridging the divide.

Market Perception and Low Turnover:

Market perception plays a vital role in the success of any economic policy. The foreign exchange market has exhibited low turnover, suggesting that investors and market participants remain skeptical about the viability of the exchange rate unification process. This pessimism is reinforced by low trading volumes and turnover reports. The lack of confidence in the market's unification is evident in the short term.

Limited Accessibility to Foreign Exchange:

Contrary to the presumed benefits of exchange rate unification, Nigerians with legitimate foreign exchange needs are still facing difficulties accessing FX from banks. This raises concerns about the effectiveness of the policy in providing equitable access to foreign exchange for those who genuinely require it. Instances of individuals' inability to access forex from banks have come to light, highlighting the limitations of the current system.

Impact of Low-Interest Rates:

The prevailing low-interest rates in Nigeria's market pose another challenge to the exchange rate unification process. Goldman Sachs, in one of its reports, emphasized the need to review deposit interest rates for N250 million and above. The negative real return, as evidenced by the recent treasury bill auction, deters foreign investors from engaging with the Naira. This scenario is reminiscent of the unattractive interest rates that hindered foreign investment in 2016.

Comparative Analysis and Concerning Trend:

Comparing current foreign portfolio investment (FPI) levels with historical data from periods of stable exchange rates reveals a concerning trend. FPI levels today are notably lower than those observed during times of exchange rate stability in 2014 and 2019, including the tumultuous year of 2016. The data from 2016, characterized by a similar exchange rate challenge, showed more favorable FPI figures.

Mixed Signals and Policy Ambiguity:

The exchange rate unification process is further plagued by mixed signals emanating from the CBN itself. The Acting CBN Governor stated that the objective is not to unify the FX rate but to ensure market efficiency, which takes time. Such policy ambiguity can exacerbate market apprehension and hinder effective policy implementation. Therefore, there is a need for policy consistency and updated communication from the Apex Bank.

The Road Ahead:

While concerns about the viability of the exchange rate unification approach persist, it is crucial to acknowledge that the process is still in its early stages. Addressing the highlighted challenges will require time, concerted efforts, consistent monitoring, and necessary adjustments. Expecting all issues to be resolved within two months of operation may be overly optimistic. Patience and continued efforts are necessary to ensure the success of the policy shift, leading to economic stability and investor confidence in Nigeria's unified exchange rate system.

The early stages of exchange rate unification in Nigeria have presented significant challenges. The persistence of the gap between official and unofficial rates, low turnover, limited accessibility to foreign exchange, low-interest rates, and mixed signals from the CBN have all contributed to market apprehension. However, with time, consistent monitoring, and necessary adjustments, Nigeria can potentially reap the benefits of a unified exchange rate system, fostering economic stability and investor confidence.