Exchange Rate in Nigeria: Unification and its Effect on Citizens

The exchange rate in Nigeria, especially between dollar and naira has been a topic of much discussion in Nigeria for many years. In the past, the Central Bank of Nigeria (CBN) set a fixed exchange rate for the naira, which was lower than the market rate. This led to a thriving black market for foreign exchange, where people could buy and sell dollars at a higher price.

In recent years, the CBN has taken steps to unify the exchange rate. In 2017, it created an Investors and Exporters (I&E) window, where businesses could buy and sell dollars at a market-determined price. In 2019, it also began selling dollars to individuals at the I&E window.

exchange rate in Nigeria

In his campaign for president, Bola Tinubu promised to unify the exchange rate further. He said that he would do this by abolishing the CBN’s multiple exchange rates and setting a single, market-determined rate for the naira.

While giving his inaugural speech President Tinubu made a groundbreaking announcement regarding his campaign promises. Revealing that his government had made the strategic decision to unify the exchange rates in Nigeria. This marked a significant departure from the multiple exchange rates regime previously implemented by the Central Bank of Nigeria (CBN) during the administration of former President Muhammadu Buhari.

In his address, President Tinubu stressed the importance of establishing a single exchange rate system. He highlighted the urgent need to redirect funds from arbitrage activities towards more meaningful and productive investments. This policy shift aimed to foster economic stability and create an environment conducive to sustainable growth.

Tinubu’s plan to unify the exchange rate has been met with mixed reactions. Some people believe that it is a necessary step to improve the Nigerian economy. Others are concerned that it will lead to inflation and make it more difficult for Nigerians to afford imported goods.

Here is a more detailed look at what exchange rate unification means and how it could affect Nigerians.

What is Exchange Rate Unification?

Exchange rate unification is the process of bringing together multiple exchange rates into a single rate. This can be done by abolishing all but one exchange rate, or by merging multiple rates into a single, unified rate.

In Nigeria, there are currently two different exchange rates for the naira: the official rate and the parallel market rate. The official rate is set by the CBN and is much lower than the parallel market rate. This is because the CBN has been subsidizing the naira in an attempt to keep it artificially low.

Exchange rate unification would mean that there would only be one exchange rate for the naira. This rate would be determined by the market, rather than by the CBN.

How Will Exchange Rate Unification Affect Nigerians?

The impact of exchange rate unification on Nigerians would depend on a number of factors, including the level of inflation and the credibility of the government’s economic policies.

In general, however, exchange rate unification could have both positive and negative consequences for Nigerians.

Positive Consequences

  • Increased foreign investment: Exchange rate unification could lead to increased foreign investment in Nigeria. This is because foreign investors would be more confident in the Nigerian economy if they knew that there was a single, market-determined exchange rate.
  • Reduced inflation: Exchange rate unification could help to reduce inflation in Nigeria. This is because it would remove the CBN’s ability to subsidize the naira.
  • Increased transparency: Exchange rate unification would increase transparency in the Nigerian economy. This is because it would make it easier for businesses and individuals to track the value of the naira.

Negative Consequences

  • Increased prices: Exchange rate unification could lead to increased prices for imported goods and services. This is because the unified exchange rate would likely be higher than the official rate.
  • Reduced purchasing power: Exchange rate unification could reduce the purchasing power of Nigerians. This is because the prices of imported goods and services would go up, while the value of their salaries would stay the same.
  • Increased uncertainty: Exchange rate unification could lead to increased uncertainty in the Nigerian economy. This is because it is a major economic policy change that could have a significant impact on businesses and individuals.

Some experts have argued that the nation will not be in a position to unify exchange rates until certain fundamental aspects of the economy are addressed. These include increased productivity, higher exports, and growth in external reserves. Improved foreign exchange earnings through the non-oil sector, and an end to the importation of petroleum products. These experts contend that if these underlying problems are not resolved, any attempt to harmonize the country’s currency rates could result in an economic collapse.

Some proponents claim that any attempt to harmonize Nigeria’s exchange rates would inevitably involve some form of official devaluation. Which they argue could yield additional advantages. They acknowledge that establishing a unified exchange rate is a challenging undertaking that requires considerable courage to succeed.

Furthermore, they contend that once the rates converge, there would be improved money movement and reduced concerns over arbitrage. However, they also recognize the difficulties involved in this process, including the high cost of living and the need for people to adapt to the new normal. Nevertheless, they firmly believe that it is essential for Nigeria to realize its full potential.

Overall, the impact of exchange rate unification on Nigerians would depend on a number of factors. However, it is important to note that there are both potential benefits and risks associated with unification. And the decision of whether or not to unify should be made after careful consideration of all the factors involved.