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Why Nigeria Adopting Single Exchange Rate Policy, CBN

The central bank of Nigeria will migrate to a single exchange rate for the naira by collapsing the multiple exchange rate policy after several years of resistance that has meant a drying up of foreign direct investment into Nigeria. The Africa biggest economy nation will merge the official rate, the rate for importers and exporters and rate for foreign-exchange bureaus, among others, according to the people who asked not to be identified because they are not authorized to speak publicly about the matter.

Nigeria has the largest oil producer in Africa has seen its currency come under pressure this year after oil prices slumped below $30 a barrel, below the government’s $57 target, amid the global fight against the spread of coronavirus and a price war between Saudi Arabia and Russia. Earnings from sales of crude account for 90% of foreign-exchange earnings and more than half of government income. An exchange rate is a rate at which one currency will be exchanged for another. It is also regarded as the value of one country’s currency in relation to another currency.

Exchange rates are determined in the foreign exchange market, which is open to a wide range of different types of buyers and sellers, and where currency trading is continuous: 24 hours a day except weekend. In the retail currency exchange market, different buying and selling rates will be quoted by money dealers.

Single Exchange Rate

Most trades are to or from the local currency. The buying rate is the rate at which money dealers will buy foreign currency, and the selling rate is the rate at which they will sell that currency. The quoted rates will incorporate an allowance for a dealer’s margin (or profit) in trading, or else the margin may be recovered in the form of a commission or in some other way.

“Today we allowed the rate at the importer and exporters (I&E) window to adjust in response to market developments,” said a senior central bank official, confirming the bank changed the rate at the window for foreign investors to 380 naira per dollar from 366 naira per dollar.

The central bank has also allowed the official rate, which was pegged at 307 naira to the dollar to weaken closer to the market rate. Government dollar earnings from oil will now be converted to naira at the higher rate, a huge boost to revenues which has been hit by lower crude prices.

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Adopting the single exchange rate is a big step forward if it means a convergence of all existing rates as it removes the opaqueness of Nigeria’s foreign exchange policy, Yvonne Mhango, sub-Sahara Africa economist at Renaissance Capital said by email

Nigeria has operated a system of multiple exchange rates in a bid to control demand for dollars. The system, which has been criticized by the International Monetary Fund, has kept the official rate at about 307 naira per dollar.

The country uses multiple exchange rates to supply cheap foreign exchange to government departments and select companies, including fuel importers. It created an importers and exporters window in 2017, in which the naira was allowed to weaken after an economic contraction in 2016.

“Hopefully the transition to a more simple, flexible rate is the first step in unpicking the trade-destroying policies that have held back growth in recent years,” Ashbourne said.

“It will cushion the impact the lower crude price will have on government revenue as it will increase the naira revenue Nigeria will get from oil exports,” Ayodeji Ebo, managing director at Afrinvest Securities in Lagos said by phone.

There has long been a consensus among essentially everyone other than the central bank that their multiple rate exchange system was inefficient, unnecessarily complex, and prone to corruption, said John Ashbourne, Africa Economist at Capital Economics by email.

Culled from Bloomberg | Virus Pushes Nigeria to Devalue Currency, Seek Single Rate

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