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Nigeria’s decision to merge its multiple currency exchange rates could stabilize the African nation’s battered economy, but could damage entrenched economic interests that depended on the old system to import vital commodities, according to economics professor Dahiru Balami.
The Nigerian naira hit a record low of 860 per dollar on the black market late last week, a month after the country’s central bank devalued the currency in a bid to close the gap between the country’s official and unofficial exchange rates.
By abandoning its artificially lowered rate, the government hoped to boost inward investment and ease a shortage in foreign currencies.
Since the last MPC, the CBN has undertaken major reforms in the FX market, collapsing all FX windows into one and re-introduction of the willing buyer–willing seller exchange. Following this, the currency was immediately devalued by 83.05% and the gap between official and parallel market rates narrowed.
While the move has led to a surge in inflation, Professor Dahiru Balami of the University of Maiduguri in an interview said, that this will likely ease as the market determines the true value of the naira.
Meanwhile, the abandonment of the fixed rate – which allowed some businesses to buy commodities at a preferential price tag – will harm industries that have “taken advantage of the multiple rates.”
With “certain economic agents” now unable to purchase oil and gas at the central bank’s rate, “industries that are crucial for the development of the country” may be forced to pay more for imported commodities, and in turn pass that increase on to consumers, he explained.
With fuel and electricity prices already climbing, the central bank will meet in Abuja on Monday and Tuesday to discuss raising interest rates.
Data reveals that FX supply still remains low as the external reserve balance has also declined significantly since the last MPC meeting.
Exchange rates across official and parallel channels have remained largely volatile at NGN768.16 and NGN860.00 as of 20th July 2023.
“Overall, we expect the Committee’s dilemma to be between the continuation of the current aggressive stance and consideration of the potential benefits of a rate HOLD,” Meristem Securities analysts said.