Implication of CBN Exchange Rate Floating

15
Jun

Posted by admin
Uncategorized

On the 14th of June 2023, the Central Bank of Nigeria made an announcement on the re-introduction of the “Willing Buyer, Willing Seller” model at the Investors and Exporters (I&E) window. The apex bank instructed that all eligible transactions are permitted to access foreign exchange at this window. Also, It was reported that the operations in this window shall be guided by the extant circular on the establishment of the window, dated 21 April, 2017. This article explains in detail the implication of CBN exchange rate floating.

%Cleaning Janitorial Services in Lagos %

Table of Contents

Exchange Rate Systems

The methods by which a nation establishes the value of its currency in relation to other assets are referred to as exchange rate systems. These systems offer a framework for setting exchange rates, whether they are fixed, adaptable, or in the middle. Here are a few typical exchange rate system varieties.

Countries can embrace a variety of exchange rate systems. Here are the main types:
1. Fixed Exchange Rate System: Under a fixed exchange rate method, the value of a government’s currency is fixed or pegged to a certain common, such as another money or a product. The exchange rate is maintained at the predetermined amount through state or central banks involvement in the foreign exchange market.
2. Floating Exchange Rate System: In a floating exchange rate system, supply and demand makes on the foreign exchange market determine the value of an economy’s money. Without the intervention of the government or a central bank, the exchange rate widely fluctuates based on various economic factors. It is largely influenced by factors like as inflation, interest rates, industry balances, and investor sentiment.
3. Managed Float or Dirty Float System: A managed glide system is a combination of fixed and floating exchange rates. While the exchange rate is allowed to differ based on market causes, the central bank intervenes sometimes to impact the stock’s value. It may do so by buying or selling its money in the foreign exchange market to maintain severe fluctuation or achieve certain financial goals.

What is a Currency float System?

This refers to the state of a currency when its exchange rate is determined by the forces of supply and demand in the foreign exchange market, without significant intervention by the central bank or government. In other words, a currency is said to have a float or a floating exchange rate when its value fluctuates freely based on market forces.

In a floating exchange rate system, the value of a currency is determined by various factors, including interest rates, inflation rates, economic indicators, market speculation, and geopolitical events. The currency’s exchange rate can change continuously throughout the trading day as these factors influence the demand for and supply of the currency.

Countries adopt floating exchange rate regimes for various reasons. It allows the currency to adjust to changing economic conditions, such as inflation or trade imbalances, without the need for constant intervention by the central bank. A floating exchange rate system can also help promote international trade by providing flexibility in currency valuations.

In contrast to a floating exchange rate, a fixed exchange rate system is when a currency’s value is pegged to another currency or a basket of currencies, and the central bank actively intervenes in the foreign exchange market to maintain the fixed rate. In this case, the currency does not have a float and its value remains relatively stable relative to the pegged currency.

The value of a currency in a system with floating exchange rates is influenced by a number of variables, such as interest rates, inflation rates, economic indicators, market speculation, and geopolitical developments. These factors affect both the supply and demand of the currency, which can cause fluctuations in the exchange rate during the trading day.

For a variety of reasons, countries use floating exchange rate systems. Without the need for ongoing central bank intervention, it enables the currency to adapt to shifting economic conditions like inflation or trade imbalances. By allowing for flexible currency valuations, a floating exchange rate system can also aid in promoting global trade.

A fixed exchange rate system, in contrast to a floating exchange rate, occurs when the value of one currency is pegged to another.

What You Need To Know About Nigeria Naira – Implication of CBN Exchange Rate Floating

The Nigerian Naira (NGN) is the official currency of Nigeria, which is a country located in West Africa. The currency is issued and regulated by the Central Bank of Nigeria (CBN). The Naira is subdivided into 100 kobo.

Here are some key features and facts about the Nigerian Naira:

Symbol: The symbol for the Nigerian Naira is “₦”.
Denominations: The Naira is available in banknotes and coins. Banknotes come in denominations of 5, 10, 20, 50, 100, 200, 500, and 1000 Naira. Coins are available in 1 Naira and 50 kobo denominations, although coins are not commonly used.
Exchange Rate: The exchange rate of the Naira fluctuates against other currencies, as it operates under a floating exchange rate system. The value of the Naira is determined by market forces and influenced by factors such as oil prices (as Nigeria is a major oil exporter), inflation, foreign exchange reserves, and economic policies.
Counterfeit Concerns: Counterfeit currency is a concern in Nigeria, and the Central Bank of Nigeria has taken measures to enhance security features on the Naira banknotes to combat counterfeiting.
Cash Dominance: Cash is widely used in Nigeria for daily transactions, and electronic payment methods, such as mobile money and card payments, have been growing in recent years but are not as prevalent as cash transactions.
Foreign Exchange Controls: Nigeria has implemented various foreign exchange controls in the past to manage currency stability and prevent excessive capital outflows. These controls included restrictions on access to foreign exchange and multiple exchange rates. However, the country has made efforts to unify the exchange rate and liberalize the foreign exchange market.

Implication of CBN Exchange Rate Floating in Nigeria

The implication of floating the Nigerian Naira (NGN) refers to allowing its exchange rate to be determined by market forces without significant intervention by the central bank. Here are some implications that can arise from a floating exchange rate for the Naira:

Exchange Rate Flexibility: A floating exchange rate will provide flexibility for the Naira to adjust according to market conditions. Changes in supply and demand for the Naira will directly impact exchange rate in the country. This flexibility allows the currency to better reflect economic fundamentals such as inflation, interest rates, and trade imbalances.
Market-Determined Value: Under a floating exchange rate regime, the value of the Naira will be determined by market forces, which helps to establish a more accurate reflection of its true value. If there is an excess demand for the Naira, its value will appreciate, while an excess supply will lead to depreciation. The actual condition of balance of trade of Nigerian economy will be determined. Therefore, this can help in promoting balanced trade and economic stability.
External Shocks: The Naira’s value in a floating exchange rate system can be influenced by external factors such as changes in global oil prices, economic conditions in major trading partners, and international capital flows. A floating exchange rate allows the currency to adjust to external shocks, minimizing the need for drastic policy interventions.
Inflation and Price Stability: A floating exchange rate will help absorb inflationary pressures in Nigeria economy. If there is increased inflation in Nigeria, the Naira may depreciate, which can help curb inflationary pressures by making imports more expensive and promoting domestic production.
Volatility: Floating exchange rates can introduce volatility in the value of the Naira. Fluctuations in the exchange rate can affect import and export costs, impact businesses’ planning and forecasting, and potentially influence investor sentiment. However, volatility can also create opportunities for businesses engaged in international trade or foreign investment.
Policy Challenges: Floating the Naira requires a careful balance of monetary and fiscal policies to maintain stability. The central bank may need to intervene occasionally to smooth excessive volatility or address disruptive market conditions. Effective policy coordination is necessary to manage exchange rate fluctuations while ensuring overall economic stability.