The biggest African economy, Nigeria, has for a long time been operating multiple foreign exchange windows that has overtime led to multiple foreign exchange markets and rates, which has acted as a disincentive to business activities and deterred foreign investment.
On June 14 this year, the Central Bank of Nigeria (CBN) governor Goodwin Emifiele announced the unification of all the segments of the foreign exchange markets replacing the old fragmented regime.
The Refinitiv Eikon data showed that after the CBN removed the trading restrictions on the official market, the naira shot to 750 to the dollar on the official market, down from Tuesday’s low of 477 Naira to the dollar.
According to Milk Index, the Naira had highly been overvalued to more than 250% -(2021 report release.
The Milk Index infers price levels across the African markets, seeking to identify under or overvalued currencies against the Dollar.
Nigeria’s annual inflation rate rose to 24.08% in July, up from 22.79% the previous month.
This is 5.71% more than the July 2022 inflation rate that stood at 18.75%. Food inflation rate hit 26.98% within the month, this is according to the National Bureau of Statistics.
The unification of the exchange rate and the removal of fuel subsidy may have fueled the rise in inflation.
Nigerian government announced the removal of the fuel subsidy that had been introduced in 1970s leading to almost tripling the pump prices.
This rise in inflation has triggered the apex bank to hike interest rates to its highest levels, with the benchmark lending rate hitting 18.75%.
Countries may pursue devaluation strategy to gain a competitive edge and therefore spurring economic development.
China in August, 2015 followed the path as it embraced open market and this led to attractive international trade for the country.
Pakistan on the other hand, facing acute balance of payments crisis and desperate to secure external financing had to devalue its rupee.
Government may decide on currency devaluation policy if they have a large sum of government issued sovereign debt, which may be hampering the economy.
Devaluation of the currency would make debt repayments cheaper.
Devaluation of a country’s currency may lead to the country enjoying expansionary international trade where the export of the country becomes more attractive as its price of goods and services become cheaper.
The imports of goods and services on the other hand will be dearer and ultimately having a desirable balance of trade for the country. The expanded export trade would trigger economic growth and create the highly needed job opportunities thus improving the livelihood of the citizens.
The dollar reserve of Nigeria has highly been depleted, dropping from highs of 39180 USD in July 2022 to USD.33950 low same month according to the CBN data.
Recently, the Nigerian stock exchange proposed allowing companies to list bonds denominated in dollar on the bourse.
This will be a big win for the country as the foreign investment will be injected and thus have access to the much needed hard currency.
For the country to gain more from the Naira devaluation, the hard currency denominated market should move to the stock market and the government securities.
Dr. Kamau Thuge, the governor of the Central Bank of Kenya (CBK), has on several occasions advocated for the denomination of the government securities to the dollar to help release the pressure of the green buck.
Would this be a good economic policy to pursue for Kenya?
