Naira and the Floating Regime, By Paul Alaje

This week begins with a new order in our currency regime. Before now USD$1 was exchanged for N197 at the fixed rate by the Central Bank of Nigeria (CBN) due to the poor competitive power of the Nigerian currency. As a result, we lost over N3 trillion in stocks, as unemployment grew to 12.1 percent, while underemployment stood at 9.5 percent of the working population of about 64 million Nigerians. The parallel market (BDCs) operators maximised the exchange rate gap between the fixed rate and the unofficial rate, as they sold the dollar at N400 in February 2016. Due to excessive speculative activities by some individuals, the CBN decided on the sales of dollars to the BDCs at the option window. The official window was only accessible to a few importers on the basis of the class of commodities they were bringing into the country. This created a demand surge for the parallel market, and consequently the prices of commodities increased almost every week by at least 10 percent.
Many analysts and economists consequently called for the devaluation of the naira or a floating of its rate without considering the real issues involved or maybe they shied away from these. On June 21st, 2016, the CBN bowed to pressure with the introduction of the floating rate regime, whereby the power of the naira is determined by the demand for it and its products, as well as the supply of it and its products. However, within four hours of the introduction of the policy on Monday, the naira exchanged at N281 to $1. Two days after, the naira further fell to N284 to a dollar. Today, the naira is N281 to a dollar. The question is, can the naira ever go back to N197?
I see people celebrate this policy, but in my opinion it will successfully fix the effects of the economic downturn but not the real issues involved. 

What is a floating exchange rate? It is a regime where a currency price is set by the forex market on the basis of supply and demand, and in comparison with other currencies. This is in contrast to a fixed exchange rate, in which the government entirely or predominantly determines the value of a currency.
Any economy that does not have much to supply to the rest of the world will suffer, especially if it is essentially a consuming market of products from the rest of the world. I think Nigeria fits into this picture. Why the naira may be at a disadvantage is very clear – we consume what we don’t produce and produce what we don’t consume. 85 percent of all our consumptions are imported, while we only produce crude oil from Niger Delta. Too bad! We don’t even refine enough quantities of this product for domestic consumption. As a result, we will keep importing since we have not changed the fundamentals of our economy. Thus, the naira will keep falling, even if subtly, over time.
What then can we do to solve these problems? We must make deliberate policies to support agriculture, SMEs, ICT, innovation etc. And, we must carefully adopt import substitution policies to reduce foreign consumption. Thus, we would reduce pressure on our dollar demands, while the naira demands remain steady. To achieve these, we must depart from the old and embrace the new economic order.
On the supply-side, the global oil price has fallen, while the activities of the Avengers in the Niger Delta have reduced production capacity due to oil pipeline vandalism. Clearly, a political solution has not been sustainable in the Niger Delta, militant activities have returned, since the end of the Jonathan administration. Likewise, the Presidential Amnesty solution of offering cash grants is not equally not sustainable in the absence of limitless resources. What Nigeria must agree regarding the Niger Delta is the development of the entire region, which is of essence today. Without developing the Niger Delta, other solutions may only be temporal.
Beyond the Niger Delta, the whole country is crying for development. We have earned over $700 billion dollars in 17 years of oil sales, however, as recent research shows, we have a 19.3 million housing gap, a 40,000 MGW power gap, a $75 billion road infrastructural gap, and many more.
For policy makers to achieve the much desired development, public funds must be channeled towards developing the country and the people in all the regions of Nigeria.