FG adopts flexible exchange rate suggesting another devaluation of the naira

The Federal Government has announced the adoption of a new flexible exchange rate policy for official transactions in a major foreign exchange policy shift.

This move which effectively suggests the third devaluation of the naira within a year will see the government adopt the NAFEX rate for its official transactions.

According to a report from Bloomberg, this disclosure was made by the Minister for Finance, Budget and National Planning, Zainab Ahmed, in a chat with the press on Monday, March 22, 2021, in Abuja.

Ahmed said the government will start to use the flexible rate that has until now applied to investors and exporters for government transactions too.

The investors and exporters window, which is generally referred to as NAFEX, has since the beginning of the year averaged N410 to the dollar as against the Central Bank of Nigeria’s old fixed rate of N379 to the dollar.

Ahmed said, “Within the government and the central bank, there is only one official rate and that’s the Nafex rate.’’

This new policy measure by the Federal Government will come as a welcome development to the World Bank and the International Monetary Fund (IMF), who have always pushed for the abolition of multiple exchange rate and the adoption of a unified and flexible exchange rate regime.

Despite the devaluing of the naira twice since March 2020, most economic and financial analysts had called for further devaluation of the naira in order to close the gap between the official rate and the black market rate.

The new policy measure is expected to ensure more transparency in the Federal Government’s management of the foreign exchange market.

The adoption of the flexible-rate policy could have a positive impact on the Federal Government’s discussions with the World Bank for a $1.5 billion loan that is partly conditional on currency reforms.

A weaker naira will boost Nigeria’s revenue from oil, which has been converted at the fixed official rate. Earnings from oil exports account for about 60% of Nigeria’s revenue and about 90% of foreign-exchange earnings.

It is, however, yet to be seen if the adoption of this new policy measure will reduce the exchange rate disparity between the official rate and the black market rate

What you should know about the NAFEX window, which is referred to as Nigerian Autonomous Foreign Exchange, was introduced by the CBN in 2017 as a way of attracting foreign investors without formally devaluing the currency. Investors who wish to repatriate their funds have recently complained about dollar shortages.

Ahmed had said that the CBN is clearing a backlog of demand for dollars by releasing some certain amounts every month. The International Monetary Fund estimated the backlog at about $2 billion in February.